Keynesian Budgets Threaten Recovery by Hans F. Sennholz

[Stephane Budge]

The 1991 and 1992 Federal budgets alarm and dismay many economists.
They are the very models of Keynesian budgets, calling for a sharp
rise in Federal spending as an antidote for recession, They propose to
boost Federal spending from $1.25 trillion in fiscal 1990 to $1.45
trillion in 1992, or 15 percent. If we add the expenditures of Desert
Storm, which is merely listed as an $8 billion “placeholder” item for
supplemental budget requests later in the year, total 1992 spending
may exceed $1.5 trillion. As political budgets usually understate the
spending totals, actual expenditures may approach $1.6 trillion.

Government expenditures of such magnitude are simply too big to be
ignored or taken lightly. They are felt not only throughout the
American economy but also all over the globe. After all, they may
affect the value of the U.S. dollar which is the standard money Of the
world, used widely by governments, Corporations, and individuals. U.S.
government spending has pocketbook effects on all continents.

Federal legislators and administrators apparently cannot free
themselves from the spell of Keynesianism. It has such a compelling
attraction because it elevates to good economics the thing they like
to do most—spend other people’s money. Keynesianism permits
administrators to yield to any and all spending pressures by Congress,
and encourages them to take the lead in new spending initiatives. It
confers respectability on political profligacy.

Unfortunately, government spending does not sustain, stimulate, or
invigorate an economy. On the contrary, it diverts economic resources
to many unproductive uses and thereby aggravates a recession. Boosts
in spending allocate more resources to the ever-growing bureaucracy
and the favorite recipients of Federal largess. This is why the
Federal budgets may actually deepen and prolong the present recession.

The budgets propose higher expenditures on preschool education and
preparation of low-income Americans for higher education. They seek
more funds toward the reduction of illness and death from preventable
diseases. They recommend a sizeable increase of Federal spending for
research and development, with special emphasis on basic research,
high performance computing, and energy research and development. They
argue for more Federal spending on highways and bridges, on airports,
the air traffic control system, and the exploration and use of space.
They propose to spend more for the expansion and improvement of
national parks, forests, wildlife refuges, and other public lands.
They call for further increases in Federal spending on drug
prevention, treatment, and law enforcement. They would substantially
raise Federal outlays to help the Federal Bureau of Investigation
fight crime, Federal prosecutors prosecute criminals, and the Federal
prison system accommodate more convicts.

To finance the additional spending of $194 billion, the budgets
envision $133.7 billion in new tax receipts, user fees, and other
collections; the $60.3 billion shortfall is added to the deficits
estimated at $318.1 billion in 1991 and $280.9 billion in 1992.
Altogether, they probably will exceed $600 billion.

The Seen and the Unseen

Yet despite such massive consumption of economic resources, nowhere do
the budget documents reflect on the obvious reduction in economic well-
being that Federal taxation and deficit spending inflict on their
victims. Nowhere do they mention a $194 billion reduction in
individual income that prevents people from spending money for
preschool education and preparation for higher education, for the
fight against illness and death from preventable diseases, for
research and development, for drug prevention and treatment, and so
on. Government spending always is presented as a benefit without cost,
a grand addition to the general welfare, a social achievement of the
highest order.

This popular view of government spending not only springs from the old
predilection of politicians for spending other people’s money but also
draws support from man’s natural inclination to prefer the seen over
the unseen. Government largess is visible to all in the form of
various benefits, lucrative contracts and privileges, and public
buildings, many of which look like Greek temples built to the gods.
What is not seen are the costs borne by millions of people who were
forced to do without preschool and higher education, who no longer can
afford medical services or purchase health and life insurance, who
must forgo better housing and warmer clothing. The marble temples of
politics which may last a thousand years are durable monuments to the
supremacy of political power over individual freedom and economic
prosperity. To a thoughtful person, they speak of onerous taxation and
painful extractions that greatly aggravate the plight of the poor.

The Keynesian call for a sharp rise in Federal spending as an antidote
for recession is neither thoughtful nor helpful; it completely
misinterprets the causes and consequences of recession and, therefore,
prescribes the wrong medicine. A recession is a time of readjustment
and recovery when businessmen correct the mistakes made in the pastand
put their houses back in order. It is an integral part of a business
cycle that begins with a boom, leads to a bust, and ends with
recovery. If, for any reason, government prevents the readjustment or
even promotes more maladjustment, it makes matters worse. In the end,
the recession may turn into a deep depression, just like the Great
Depression during the 1930s.

The present recession had its beginning during the 1980s when the
Federal Reserve System, the monetary arm of the government, ignited a
boom with numerous bursts of new money and credit. It helped finance
Federal budget deficits of nearly $2 trillion, permitting the Federal
debt to rise to $3 trillion, plus approximately $1 trillion in agency
debt and off-budget guarantees. It rushed to the rescue of many
governments of Third World and former Communist countries which
incurred and now labor under $600 billion of foreign debt. The Fed
kept alive hundreds of banks and S&Ls suffering in the vise of
regulation and inflation. Helping to build large pyramids of junk-bond
debt, it facilitated a great takeover game that enabled promoters and
speculators to assume control over giant corporations. Banks amassed
$700 billion in loans for mergers and acquisitions and another $700
billion in loans on real estate. The Fed even financed the rescue of
various corporations and city governments chafing under heavy loads of
political debt.

During the 1980s total debt nearly doubled to an estimated $12
trillion, much of which is of low quality. The growth of debt did not
lead to economic growth; instead, it facilitated government handouts
and corporate mergers, acquisitions, and leveraged buy-outs. It caused
real estate and stock prices to rise dramatically, while economic
output, according to the Tax Foundation, stagnated, and median average
income after direct Federal taxation and inflation declined by 9.2
percent.

Recovering from Recession

A recession or depression is a cleansing affair that exposes mistakes
and manipulations and calls for corrections and remedies. The present
recession is the inevitable consequence of the mountains of
unproductive debt that financed many ill-advised ventures and now
weighs heavily on the debtors. It will end as soon as the debt burden
has been reduced to a more bearable level. Debt relief may come
through bankruptcy and rescheduling, write-offs, and pay-offs. The end
may be in sight when falling interest rates signal not only a decline
in lending risk, but also the arrival of new savings in the market.

Under the sway of Keynesian thought, many politicians and officials
are determined to hasten recovery through deficit spending and money
creation, which they call “contra-cyclical.” Actually, their policies
are “contra-recovery”; they aggravate and prolong the recession by
consuming capital en masse, crowding out business, and depressing
business activity. The currency and credit expansion falsely lowers
interest rates, which again misleads businessmen in their investment
decisions. In short, government deficit spending and money
manipulation are the most potent recovery suppressors.

The present recession may prove this point. When Federal deficits are
made to swell to Unprecedented levels while the recession deepens and
lingers on, the Keynesian model obviously fails to demonstrate
economic reality. It misinterprets the causes of recession and,
therefore, prescribes a wrong medicine, in fact, a very harmful
medicine.

There are three types of people in the world. Some learn from their
own mistakes—they are experienced and wise. Others learn from
deliberation and observation of the experience of others—they are
diligent and intelligent. The third type learns neither from their own
experience nor the experience of others—it comprises the fools. The
severity and length of the present recession will clearly reveal which
type of legislator and administrator is holding forth in Washington.