Monday, September 27, 2010

Waste, Political Degradation, and Tubes of Money

-- Posted by Neil H. Buchanan (from London)

Professor Dorf apparently viewed my departure from the country as an opportunity to turn his attention to economics, posting some very useful thoughts last Thursday about the new national obsession with government spending. I have very mixed feelings about how knowledgeable Mike -- a con law scholar -- is about Keynesianism, given how little con law I know. (My reference to Griswold last week hardly counts.) Need I ever return to the U.S.? Maybe.

In the extremely good discussion of Mike's post on the comments board, a question arose about the value of wasteful (and even destructive) government spending. Even someone with a rather sophisticated understanding of Keynesian policy recommendations during a recession could understandably -- though incorrectly -- conclude that Keynes was indifferent to the content of the spending that a government might undertake to bring the economy back to full employment. Indeed, the scorn among some on the left for "military Keynesianism" is based precisely on this idea.

That is, it is a matter of some embarrassment that the first truly successful Keynesian stimulus program was enacted in Nazi Germany. The German economy finally arose from its prolonged economic disaster (which had been made much worse by the victorious allies' insistence on receiving compensation payments for WWI), quickly becoming a global economic powerhouse, by putting people to work building tanks, bombs, airplanes, guns, bullets, uniforms, and so on. The U.S. also never really emerged from the Great Depression until we went to war, which gave us the excuse to increase the debt ("Buy Bonds!") in order to win an existential conflict.

In fact, the quasi-Marxist left has taken the point further and claimed that a modern capitalist economy cannot maintain full employment without periodic bouts of outright destruction. Under certain (actually not outlandish) assumptions, one can show that a modern economy can only be kept at full employment by engaging in so much investment that the capacity of the economy will grow systematically faster than the labor market, preventing the labor market from catching up with the moving target of the economy's growing productive capacity. Hence, the need for a jolly good war every now and then, to allow the capital stock (and that pesky population of the unwashed) to be knocked back down to size.

One need not be nearly so pessimistic or cynical, however, to imagine that Keynesians are perfectly happy with wasteful spending during a recession. Even a Keynesian peacenik, one imagines, could think of some clever ways to put people to work such that they do not add to the productive capital stock, yet still paving the way for a return to full employment.

Which brings us to the buried tubes of money. As Mike noted in response to a question on the comments board, Keynes once described a truly silly way for the government to put people back to work. Professor Hockett corrected him on some minor details, but the basic story was right, as far as it went. Keynes really did describe a plan to have the government hire thousands of unemployed people to go into the forests and bury tubes filled with money in unmarked spots. He did not, however, say that the government should then hire other people to dig up the money.

The context of the money tubes suggestion makes quite clear that it was a sarcastic joke. The import of the joke, however, was not to make the point that "it doesn't matter what we spend it on, so long as we spend it." That is true during a recession, and it is an absolutely essential insight, as far as it goes; but the point that Keynes was making was much deeper. Keynes was, in that passage, ridiculing "the captains of industry" for their self-satisfied adherence to what we would now call (thanks to one of Keynes's disciples, John Kenneth Galbraith) the conventional wisdom. Specifically, Keynes said that the problem of inadequate spending should be an occasion for engaging in public investments, such as building adequate housing for the poor. The captains of industry, however, will always soberly warn us that having the government build housing for the poor is bad business, for all of the reasons that were already old hat in the 1930's.

What do the captains of industry (today known as Big Business) think is good business? Sending people out into the wilderness to dig holes in search of money! Keynes was, in other words, noting that the people who were against "wasteful spending" thought nothing of having businesses hire people to extract gold from the ground -- even though there is no good reason for any country's monetary system to be based on gold. (Note that people like Glenn Beck today are hawking gold as "real money" and "a safe investment," in response to Obama's flight into socialism, communism, Nazism, and his father's fevered Kenyan dreams.)

The brilliance of Keynes's example of the money tubes, therefore, was actually in its second step. After the government-hired workers had buried the money, entrepreneurs (who are ever assumed to be hard-headed and always rational in their pursuit of profit, mediated by the market to guarantee efficient outcomes) would then organize companies to hire workers who would go out and find the tubes, dig them up, and then bring the tubes of money back to the entrepreneurs. This, the captains of industry would agree, is good business. (I'm tempted to invoke the immortal line, "It's a series of tubes!" but I just can't figure out a way to make it relevant.)

The money tubes suggestion was thus a way to show that the implicit priorities of the moneyed classes were (and still are) deeply perverse. People being hired to do useful things like build houses, hospitals, and schools? Preposterous! People being hired to dig up pieces of paper? All hail the profit motive and Sound Money!

Of course, no government would want to do anything so silly as to hire armies of people to bury tubes of money in the first place. Unless they had no choice. If the political culture is so degraded that valuable public investments are off the table, simply because of the (repeatedly-disproved) belief that the government can never do anything right, then it is time to opt for choices that are politically thinkable and that at least have the virtue of putting people back to work -- even though they do so without creating long-term value.

Today, sadly, the political culture is even more degraded. Productive public investments are off the table, jobs programs are off the table, and government spending to hire privately-employed workers is off the table. Only spending cuts, and tax cuts for the rich, remain. Which makes that idea about the money tubes look pretty smart by comparison.