Why We Should Downsize Goverment During A Crisis — or, Why We Should Ignore the Keynesians

Someone on our local mailing list asked:

Does anyone know which saves more jobs–increasing taxes to avoid firing any public employees, or downsizing government to decrease taxes? Someone loses jobs EITHER WAY in the short term, the question is which leads to more jobs overall so that everyone, even those that lose their jobs, has a better chance of finding a new one.

The problem here is that economists should know the answer, and if you ask five economists a question you’ll get at least ten completely different answers. Which of these many experts are you supposed to trust?

Here are three factors that decide the issue for me. They’re in terms that I understand, which might not be the ones sanctioned by the various schools of economics.

1. Government jobs typically have social value, but not high economic value.

   Cops, firefighters, social workers, teachers, and so on all contribute to our society: They have “social value”. But there’s usually no profit motive, stockholder benefit, or other economic benefits.Meanwhile, private-sector employees are generally focused on increasing revenue and / or profits, which are activities with “economic value”.

   That doesn’t make either one good or bad. I wouldn’t want to do without cops and teachers, but we could lose iCarly and I wouldn’t blink. This is also an oversimplification, so I know that people will be able to argue with me. But I don’t think it’s crazy, as a general principle.

   Now, to pay a government employee, you need to take tax money from a business or individual. In other words, you need to reallocate money, taking it away from something of economic value and giving it to something of social value.

   There’s nothing wrong with that — social value is valuable! — but it implies that we need to find the right balance: How much of our economy should be directed toward social value, and how much to economic value?

   In times of economic crisis, I’d say our default position would be to redirect more effort to economic value than to social value: Focus on job creation and retention in the private sector, not job retention in the public sector.

   To make this local: During times of financial crisis, I think ItalMart, Kmart, Subway, General Cinema, etc. are more important to our recovery than librarians, teachers, cops, and garbage collection. If Subway went out of business, that would be less money to pay librarians, teachers, cops, and garbage collectors in the future; better to take a hit on the public-sector side now and improve our local economy than to protect the public-sector jobs this year and have less money to pay them next year.

   To preempt the obvious objection: I don’t want to lay off all the teachers or shut down the library. I want a balance, but the balance needs to favor the private sector.

2. Governments frequently take on debt in order to keep spending in times of economic crisis, and don’t pay it off.

   Someone named Warren on the mailing list used a “Keynesian” approach (named after the guy who codified it) to economics in his post. Many in government favor it, and I’d warrant that many Democrats are Keynesians first, and like the Democratic party because it adheres to Keynesian economics.In a bad economy, the Keynesians say, the government should continue to spend, perhaps even increasing its spending, in order to stimulate the economy. Since it’s a bad economy, the government is spending more at a time when there’s less money to spend. That leads to increasing debt.

   That’s okay, the Keynesians say, because during good times (which will come faster because of the stimulus) you can pay off the debt.

   I can see why they’d say that. But we usually act on the first part and ignore the second part: We say “It’s a crisis! Spend more money!” during bad times, and “Let’s expand these great government programs!” during good times.

   We’re too undisciplined to adhere to Keynesian economics, so we shouldn’t pretend we’re following Keynesian principles. Even if the Keynesians are right, it doesn’t matter, because we don’t do what Keynes said we should do!

   To put it a different way: Warren linked to a Paul Krugman article (he’s a Nobel-winning economist and a Keynesian) that opens, in his usual condescending way, with, “Spend now, while the economy remains depressed; save later, once it has recovered. How hard is that to understand?” It’s not hard to understand, Paul, we just have no evidence that we will actually follow through on the saving part. We’re not stupid, we can just see how obviously undisciplined our governments are.

   Therefore, we shouldn’t let the government go significantly more into debt during bad times. Therefore, we should be prepared to cut the government side during a downturn rather than increasing debt.

3. The more money and power government has, the more dependent and less free its citizens are.

   Someone recently said he couldn’t understand the connection here. I will make only two points:

   • People become less free in a nanny state because they get the mentality that the state will take care of them. The dependency is mental and moral, not legal, but it’s still caused by the state having too much influence over their lives.
   • When states (by which I mean US states and nations) get more money and power, they take over more aspects of people’s lives. By definition, even. If a state gets money, it has to spend it on things, and those things affect its citizens.

   I think there’s an ideological gap between us that will be hard to overcome, so I won’t elaborate further. You either get this or you don’t.

There you go: why we should ignore the Keynesians even if they’re right.