Monthly Archives: May 2018

Inferior Schools, Venom For Reformers

28 Monday May 2018

Posted by in Regulation, School Choice, Socialism, Uncategorized

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We all want better K-12 education in the U.S., which has an extremely uneven — even dismal — record of student outcomes. The U.S. ranks below the OECD average in both math and science scores, despite spending 35% more per student than the OECD average. Yet there is a faction that leaps to the defense of the status quo with such viciousness that its members deride sensible reform proposals as classist and racist. Then, of course, they call for additional spending! These antics reveal their self-interest in doubling down on the status quo.

An obvious starting point for reform, and one that would save taxpayers roughly $40 billion (K-12), is to dismantle a federal education bureaucracy that adds little value to educational outcomes. Another element is expanding the set of alternatives available to parents over the way their children are educated. Betsy DeVos, President Trump’s Secretary of Education, favors both of these steps as general principles, though she lacks direct control over either, especially school choice.

Both of these steps are fiercely resisted by the public educational establishment and teachers unions. And no wonder! Who wants to lose their privileged monopoly power over a local market? The public school establishment does not wish to be troubled by demands that schools respond to competitive forces, that teachers be rewarded based on performance, or that schools should be answerable to parents and taxpayers. As for the federal role, the public school cartel seems to welcome federal money, even if it means that the feds impose control in the process.

Choice

For those skeptical of reforming public schools by allowing choice, Don Boudreaux proposed a useful thought experiment that I discussed in my earlier post “Public Monopolists Say Don’t Be Choosy“. It examines a hypothetical world in which supermarkets are structured like public schools. Consumers pay for their food via local taxes and must shop at one local public supermarket, and only one, at which food products are available at no additional marginal cost. However, parents are free to pay their taxes and pay for food elsewhere, at a private supermarket. Most thinking people would probably agree that this is a spectacularly bad idea. Public supermarkets would deteriorate relative to private supermarkets. Rural and inner city supermarkets would likely suffer the most. Public supermarket worker unions would lobby for higher food taxes. And of course proposals for supermarket choice would be met with hysteria. Read the earlier post for more discussion of the likely consequences.

One of the arguments often made in favor of today’s public school monopoly is that K-12 education should be regarded as a necessity, but few would take that as a compelling reason to grant government a monopoly in the retail food business. A better argument for government schools, were it strictly true, would be that education is a public good, yielding significant non-exclusive benefits to the community. And in truth there are some external benefits to society from an educated citizenry. The primary benefits of an education, however, are exclusive to the student. Kevin Currie-Knight offers an excellent treatment of the education-as-public-good question, and he concludes otherwise. And the public-good argument does not imply that parents should be denied choice in their selection of a school for their children. Ultimately, the policy question hinges on whether government schools, as currently structured, do a good job in educating students, and as Corey A. DeAngelis points out, they do not.

There is no shortage of evidence that school choice is beneficial for students and society in several respects, including academic outcomes for students and schools, racial integration, fiscal impacts, and parental satisfaction. This paper by MIT researchers found that school choice improved educational outcomes for special education students and those who were not proficient in English. This essay in Education Week, signed by nine educational researchers, emphasized the preponderance of positive findings on school choice and some additional dimensions of improvement on which they hope the education research community will focus.

The promise of choice is seldom greeted objectively by the public education establishment and its reflexive allies. To their dishonor, distortions of fact and ad hominem attacks on choice advocates are almost the rule. For example, John Stossel writes the following in “Why the Left Hates Betsy DeVos“:

“When she spoke at the Kennedy School of Government, students held up signs calling her a ‘white supremacist.’ … When she tried to visit a school, activists physically blocked her way. … The haters claim DeVos knows little about education, only got her job because she gave money to Republican politicians, and hates free public education.“

Of course, public education is not free! But it is a disgrace that someone so dedicated to the cause of improved education should be treated this way. The DeVos family has given over a billion dollars to various causes over the years, much of it to educational initiatives, and even those gifts, somehow, are seen by critics as a pretext for vilifying Betsy DeVos. But she knows much more about the poor performance of public schools than her critics care to discuss, as well as the dynamism and improvement that choice and competition can bring to education. Her critics disparage the performance of charter schools in DeVos’s home state of Michigan even while the facts show that they have performed well.

The idea that charter schools “hurt” public schools by creating educational choice is the very weakest protest a monopolist can put forward. These critics conveniently overlook the fact that most charter schools are in fact public schools! More importantly, an erstwhile monopolist must respond by adding value for consumers! If it fails to do so, it must be closed or reorganized. THAT is a good idea!

Monopoly public schools do not earn a profit in the way of monopolistic business enterprises, but remember that perhaps the greatest social costs imposed by monopolies are languid effort and a poor product. This is not to dismiss the great efforts of many teachers who toil under trying circumstances, though the current system also tends to protect bad teachers. And much of the waste in government schools is caused by bloated bureaucracy and costs imposed on teachers and schools of complying with regulation. 

The Federal Bureaucracy

Another priority of Secretary DeVos is to reduce the federal role in education. Hurry, please! The unpopular Common Core standards, implemented in 2009, proved a failure. Test scores declined for student cohorts expected to benefit the most (those in the lowest percentiles). At the last link, Nancy Thorner discusses more recent legislation:

“It was in December of 2015 that Congress passed the Every Student Succeeds Act (ESSA), that replaced the often criticized No Child Left Behind Act (NCLB). ESSA, in contrast to NCLB, signified a clear move away from federally prescribed standards. In fact, ESSA expressly forbid federal regulators from attempting to ‘influence, incentivize, or coerce’ states to adopt the Common Core.”

That’s progress, but 36 states plus DC still use those standards. Curriculum mandates are only one area of federal school regulation that must be addressed. “Educational equity” is also mandated along several dimensions, requiring schools to devote a disproportionate share of resources to various subsets of students who might not benefit from the extra instructional intensity. Then there are the administrative costs of demonstrating compliance with these mandates, not to mention the virtual prohibition under these mandates of developing innovative, local solutions to the problem of educating their charges.

There is well-deserved pushback against federal control over school discipline, which requires schools to implement policies that avoid disparate impacts on certain minorities (African Americans, Latino, and special-ed children) such that they are no more likely to receive detention, suspension, or expulsion than the general student population. This is an absurdity, potentially requiring schools to go light on offenders should they happen to belong to a minority. Even worse, if the enforcement of discipline results in an observable bias in favor of any minority, it is likely to be noticed by the minority students themselves, creating a negative behavioral incentive and potentially stoking resentment among non-minority students.

In April, President Trump signed an executive order authorizing a review of federal education rules imposed on states and local school districts. Again, central regulation is costly: it involves rule-making at the federal level to interpret enabling legislation, then review by state departments of education where specific policies are designed, which are then passed down to school districts and individual schools, who must review and attempt to implement the policies, and who then must report back on their success or failure in meeting the mandates. Resources are consumed at every level. In the end, the process creates increased complexity, and the policies have proven to be of questionable value to the goal of good education. While spending on education has soared over the past 30 years, student achievement has remained static, and the same disparities of outcome remain.

Secular Statism

Robert P. Murphy provides a brief history of U.S. public schooling. It is a fascinating take on the history of secularization of education in America. It is the story of the substitution of state for private institutions, including family and church, in the development and socialization of children. Murphy offers a telling quote:

“Thus Henry Brown, second only to Horace Mann in championing state education, commented, ‘No one at all familiar with the deficient household arrangements and deranged machinery of domestic life, of the extreme poor, and ignorant, to say nothing of the intemperate—of the examples of rude manners, impure and profane language, and all the vicious habits of low bred idleness—can doubt, that it is better for children to be removed as early and as long as possible from such scenes and examples.'”

Whoa! The K – 12 public education system, as it now stands, is striking in its failure to benefit the children and families it is intended to serve. Critics of meaningful reform do not acknowledge the abysmal condition and performance of many government schools in America today, except to insist that they need more money. These critics, including the educational bureaucracy, teachers unions, and misguided statists generally, behave as if they accept the attitudes expressed by Henry Brown. They have no respect for private decision makers — families, churches, private schools of any stripe, and private markets in general. They do not understand the power of incentives and competition to allocate resources efficiently and maximize well-being. But they know how to disparage, defame, and propagate hateful rhetoric for those with a true interest in creating a better educational system for all.

You’re So Virtuous… I’ll Bet You Think This Post Is About You

21 Monday May 2018

Posted by in Moral License

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Altruism is an admirable quality, but advertising one’s altruism too much is rather unseemly. Social media has a way of coaxing humblebrags out of people, as well as not-so-humble brags: Everyone wants everyone to know that they care. That they give. That they support defenseless animals… and value diversity… and tread lightly upon the earth… and live “sustainably”… and despise polluters… and condemn racists… and want to shut down puppy mills…. and sneer upon bourgeois, consumerist values. They pay it forward!! And they want you to know!

These expressions of goodness come in many forms, and they are so common on social media that a bit of training permits a fairly rapid scroll rate through the news feed. People just can’t help but lay it on. Companies do too. So do politicians. Everyone wants everyone else to know how nice they are. It’s known as conspicuous virtue, or virtue signaling.

For now, let’s confine the discussion to relatively uncontroversial ideas or causes. If you are truly generous and perform good works on behalf of those less fortunate, that is all to the good. Racism is abhorrent. Sympathy for victims of crime, disease and natural disaster is a fine thing, including the puppies. Then what’s the harm in a little conspicuous virtue? Is it simply that it’s gauche?

Experimental economic research has discovered some nasty “license effects” associated not only with brags, but even good works with which one may be associated, such as an employer’s corporate social responsibility (CSR) efforts. That means, for example, that by announcing your goodness, you give yourself license to do bad. This interesting transcript of a Freakonomics Radio podcast includes an interview with University of Chicago economist John List and comments from social psychologist Daniel Effron of the London Business School. Both discuss research findings that should temper our enthusiasm for purposeful shows of virtue, as innocuous as those displays might seem.

First, however, List found a “supply side” benefit for employers when informing potential job seekers about the firm’s good works. He actually obtained a contract to perform a task, set up a company to do it, and then he recruited applicants. One group was told about the firm’s good works and a control group was not. The former group was significantly more productive on the job. So far, so good! However, in a separate experiment involving a more tedious task, some of the “CSR workers” had a tendency to cheat, perhaps subconsciously, in ways that made the job easier and faster, offsetting their own productivity advantage. These workers apparently felt that they had moral license to cheat, one conferred by the knowledge that the company was performing good works. Daniel Effron says:

“… people have surprisingly low standards for what counts as a moral license. It’s not just actively doing things that feel like good deeds. People feel like they have license when they reflect on the bad things they could have done, but didn’t.“

Effron describes an experiment demonstrating that consumers who declare a preference for green products have a greater likelihood of lying, cheating and stealing in a later task. Separately, those subjects who expressed support for Barrack Obama in 2008 felt more at liberty to express a seemingly prejudiced view on the hiring of a white or a black police officer. In another case, List notes that charitable deductions are associated with cheating on taxes in other ways.

It’s possible that all efforts to signal positive qualities to the world are associated with some offsetting, negative behavior. This possibility is illustrated by the research findings of Keith Wilcox, Henrik Hagtvedt, and Bruno Kocher in “The Less Conspicuous Road to Virtue: The Influence of Luxury Consumption on Socially Valued Behavior“. They find that while luxury consumption of goods is associated with greater work effort and acts of charity, conspicuous luxury consumption is associated with less effort and charity. This is a slightly different mechanism, as the signaling seems to be a show of one’s economic worth as opposed to a show of altruism or goodness. Nevertheless, the intent to signal reflects an other-directedness, not always a positive quality, and it also seems bound up with some negative social propensities.

Conspicuous consumption is a phenomenon described in 1899 by Thorstein Veblen in The Theory of the Leisure Class. Today, conspicuous virtue seems to inform a certain kind of conspicuous consumption. Joseph Rago notes the following:

“Conspicuous consumption stays with us today. But increasingly, it seems to me, many consumers are not seeking an outright demonstration of wealth. Instead, they consume to demonstrate their innate goodness. They spend not to suggest the deepness of their pockets but the deepness of their hearts. We inhabit, to update Veblen, an age of conspicuous virtue.

… Conspicuous virtue offers to those with guilty consciences a way to feel OK about consumerism. A fine scotch is vulgar. A “fair trade” scotch is righteous.”

A post on the Freakonomics blog in 2011 acknowledged a so-called “Prius” effect: people pay thousands of dollars above the economic value to the owner and the conservation value of the vehicle in order to signal to others their environmental commitment. Clearly, some consumers were willing to pay dearly for this conspicuous virtue.

Efforts to signal one’s virtue involve a desire to come off as “nice”. A recent post on the Declination blog discusses a so-called “niceness effect” under which observers seem to prefer facially “nice” points of view over the application of logic and dispassionate analysis. This brings us back into the more controversial forms of virtue signaling. A simple example: an expressed, “nice” preference for more generous public aid over proposals that improve work incentives. Unfortunately, the “niceness effect” leads to preferences for any number of irrational policies, as the author “Thales” at Declination so ably discusses. People are cowed by the appearance of “niceness” and want to look “nice” to their peers, damn the unintended consequences.

Negative license effects have been shown to exist as a dark underbelly associated with: the knowledge that one’s employer performs acts of social responsibility; not doing a bad thing that one could have done; stating a preference for goods presumed to be environmentally-sound; declaring support for electing the first African American candidate as president; claiming charitable tax deductions; and conspicuous luxury consumption. Still, granting oneself “moral license” almost surely does not offset the social benefits of real charitable acts. That’s pure conjecture on my part, of course, and it might not always be true. And I’m not so sure that acts of professing good works, intentions, and “niceness” do anything more than reassure self-nominated apostles of their goodness, while granting them license to please themselves in ways that might be regarded as sociopathic.

We live in an age of rampant narcissism, and social media can serve to magnify those tendencies. So please, promote your causes, but speak softly about your own contributions and good intentions, and try to resist the temptation to take moral license. Now where did I put the scotch?

Secession and Other Remedies for Intrastate Revolt

14 Monday May 2018

Posted by in Federalism, Regulation, Tyranny, Uncategorized

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How many states will we have in the Union in twenty years? Probably 50, but there’s an outside chance that the number will be 55 plus. That could include a split of upstate New York from New York City, downstate Illinois from Chicagoland, eastern from western Washington State, eastern from western Oregon (or eastern Oregon combining with Idaho), and a division of California into as many as six states, as one proposal has it. There are secessionist movements alive in all of those states and it has happened before, as Glenn Reynolds notes in his recent paper “Splitsylvania: State Secession and What to Do About It“.

The origins of state boundaries and state governments were probably based on combinations of natural geographic features and confluent economic and political interests existing at the time. It would be surprising if those factors remained in static alignment over time, however. For various reasons, West Virginia seceded from Virginia many years ago, and Tennessee was once part of North Carolina. But to the extent that interests diverge within states, would a series of secessions promote better representative government? Reynolds’ approach to this question is fairly even-handed, though he apparently leans toward less disruptive solutions to the kinds of grievances voiced by secessionists.

Secession is a complex process; it obviously involves a major task in establishing a new state governmental apparatus. Also, legislative roadblocks to secession movements exist at both the state and federal levels. Nevertheless, there is great disaffection among rural interests in the states mentioned above for the policies they say are forced upon them by “urban elites”, as Reynolds calls them. At present, the secession of rural areas would tend to benefit republicans at the federal level, as two new Senate seats would be created to offset the seats held by democrats elected in more urban areas. Conceivably, however, the same process could work in reverse in other states, such as Texas. Even the proposal for six Californias seems designed to at least neutralize any possible negative impact on democrats in national politics.

Reynolds’ paper outline a few ways in which interests represented by legislative minorities, such as rural populations, could be better served without a step so drastic as secession. State regulation is often what rankles secessionists. To add fuel to the fire, states are free to adopt rules that are more strict than rules established under federal legislation, if they so choose, but never rules that are less strict. Today this applies to wages, working conditions, gun regulation, and environmental law. Reynolds suggests turning this on its head:

“The federal government’s legislative role has traditionally been the opposite: To use (as in the case of the 1964 Civil Rights Act) a national majority to ensure that local majorities can’t oppress local minorities. I thus suggest that federal laws regulating these key subject-matter areas be recast to pre-empt more restrictive state laws, meaning that urban regions would be unable to impose stricter laws on less- powerful rural areas. If this seems too inflexible, perhaps that pre-emption should in some cases be defeasible at the county level; if the government of a county affirmatively wants to accept stricter state regulations, then it may do so, but if not, then the federal regulations are a ceiling, as well as a floor.”

Reynolds contends that this approach would be relatively easy to defend against state challenges. The idea that federal rules provide minimum standards of regulation is only one interpretation of the Supremacy Clause of Article VI of the Constitution. There is no reason why federal legislation cannot be written in the way Reynolds describes. Moreover, Reynolds asserts that the Guarantee Clause of Article IV, which assures that mandates are to be established according to republican principles, could be used to buttress this argument. But he offers another remedy to curb secessionism among rural voters that states could exercise:

“There is nothing to stop a state from being mindful of the differences between urban and rural areas when crafting legislation or regulations, after all. States could adopt a local-option regulatory scheme relating to key subject areas on their own, and by doing so would lighten their footprint in rural areas and lessen the likelihood of festering resentments.”

Perhaps that’s hoping for too much. State majorities are unlikely to cede power to rural minorities, but it’s nice to imagine that sort of cooperation. There is no question that this sort of state regulatory approach would protect local interests from the tyranny of one-size-fits-all state regulation, but it wouldn’t eliminate the burdens created by the standard interpretation of federal supremacy.

In general, federal preemption of stricter state laws is no less consistent with the principles of federalism than federal pre-emption of more lenient state laws. One could even argue that the best way to apply federal supremacy depends on the issue, so there is some symmetry in Reynolds’ proposal. In terms of representative democracy, it is less an evil than federal preemption of less restrictive laws. It does what a democratic republic is supposed to do: protect minorities from the tyranny of a majority.

Secession from states is an intriguing possibility. Perhaps it is even the best approach in some cases. Nevertheless, Reynolds’ suggestions for revising federal and state regulatory approaches would be less costly and would avoid a nationwide race to subdivide states in order to gain a federal political advantage.

A Voluntary Redistribution of Sex

11 Friday May 2018

Posted by in Free markets, Prohibition, Redistribution, Uncategorized

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“Incels” have received plenty of bad publicity since the horrifying van attack in Toronto two weeks ago. It was preceded in 2014 by a killing rampage in California perpetrated by an individual with a similar profile. In case you haven’t heard, an incel is an involuntary celibate, either male or female, though male incels have garnered nearly all of the recent attention. Whatever their other characteristics, incels share a loneliness and an unmet desire for intimacy with other human beings.

Lux Alptraum shares her views about the differences between male and female incels. She blames “angry, straight men” and “toxic masculinity” for both the violence that’s recently come to be associated with incels and the relative inattention paid to the plight of female incels. I value her perspective on the issue of female incels. There are obviously extreme misogynists among males in the incel “community”. Some are so enraged by their plight that they engage in on-line bullying, and a plainly deranged segment of incels, including the perpetrators of the crimes mentioned above, have advocated violent retribution against those they deem responsible for their low sexual status. That means just about anyone who can find a partner.

Alptraum paints male incels with a very broad brush, however. Similarly, various leftist writers have categorized incels as predominantly “right wing” and even racist, but involuntary celibacy and misogyny do not lie conveniently along a two-dimensional political spectrum. Incels are present in many groups, crossing racial, religious, and political lines. There are incels among the transgendered and undoubtedly in the gay community. Gay individuals can exist in relative isolation in towns across America. Physical disabilities may condemn individuals to involuntary celibacy. And not all incels are “ugly”; instead, they may suffer from severe social awkwardness. But there are bound to be incels who live quiet lives, unhappy, but adjusted to their circumstances, more or less.

The recent focus on incels has prompted some interesting questions. Ross Douthat’s opinion piece in The New York Times asks whether anyone has a “right to sex”, as some incels have asserted. Robin Hanson discusses the idea of a “redistribution of sex“, noting in a follow-up post that governments throughout history have influenced the distribution of sex through policies enforcing monogamy, for example, or banning prostitution. Voluntary agreements to exchange sex for remuneration are one way to alter the distribution. In fact, to demonstrate the lengths to which a government could go to redistribute sex and intervene against “sex inequality”, Hanson mentions policies of cash redistribution, funded by taxpayers, to compensate incels for the services of prostitutes. There are examples of such benefits for the disabled. Here is Alex Tabarrok on that subject:

“In the UK charities exist to help match sex workers with the disabled. Similar services are available in Denmark and in the Netherlands and in those countries (limited) taxpayer funds can be used to pay for sexual disability services.”

Subsidies and charity aside, it’s easy to understand why prohibition of sexual services for hire would be seen as an injustice by those unable to find partners willing to grant sexual benefits. From a libertarian perspective, trade in sex should be regarded as a natural right, like the freedom to engage in any other mutually beneficial transaction, so long as it does no harm to third parties. One’s body is one’s own property, and it should not be for government — or others — to decide how it will be used.

Laws against prostitution do great harm to society and to the individuals involved in the sex business. Forget about ending prostitution. That will never happen. According to  Abigail Hall, there are about 1 million prostitutes working in the U.S. They almost all work underground, with the exception of those operating in legal brothels in Nevada. Prohibition keeps the price up, but the workers capture a low share of those returns. Their bosses are harsh masters relative to those in legal businesses. These workers cannot report crimes against them, so they are often subject to the worst kinds of abuse. Illegality usually means they don’t have access to good health care, which places customers at greater risk. Legalizing (or decriminalizing) prostitution would reduce or eliminate these problems. From Hall:

“By legalizing the sex trade, we would allow those involved in the sex trade to come out from the shadows, use legitimate business practices and legal channels, and decrease the likelihood that women will be trafficked by violent groups of criminals. … As prostitution becomes a legitimate profession, it allows for prostitutes to be more open with their doctors about their sexual history and seek treatment for STIs and other problems.”

Many object that prostitution exploits women, legal or not, and that it exploits low-income women disproportionately. But there will be voluntary sellers as long as there is a market, again, legal or not. And there will be a market. As for a disparate impact on the poor, Hall says:

“The fact that those who select prostitution as a profession may be poor is inconsequential…. It may be true that some women who work as prostitutes would strongly prefer another profession. Even if this is the case, women who voluntarily choose prostitution as a means of income should be allowed to practice their profession in the safest environment possible.”

The ongoing development of “sex robots” offers an avenue through which incels might enjoy activity that approximates sex with a human being. These robots are becoming increasingly realistic, and their costs are likely to decline dramatically in coming years. For incels with a congenital inability to interact with other human beings, this option might be far preferable to hiring the services of a prostitute. And the introduction of both male and female sex robots into senior care facilities might reduce the likelihood that sexually aggressive residents will abuse others. It happens.

Free markets are amazing in their ability to maximize the well being of both consumers and producers of a good or service. Trades are mutually beneficial and therefore are voluntary, and price signals redirect resources to their most valued uses. The prohibition on prostitution, however, has made it a very dangerous business for practitioners and customers alike. Prohibition has led to dominance by organized crime interests and local strong-men and -women. It has also thickened the intersection of prostitution with other prohibited activities, such as the drug trade. This creates a toxic criminal environment within which women are trapped and abused. Legalizing prostitution would liberate these individuals and create safer conditions for them and their customers. Private solutions would still be available to those who wish to keep prostitution out of their buildings or neighborhoods. And legalization is one way that sex could be made safely and voluntarily accessible to incels. Perhaps, one day soon, the availability of sex robots will help incels satisfy their desires as well. Some incels will still harbor strong resentment toward those for whom sex is not out of reach. Nevertheless, it is reasonable to ask whether such a “voluntary redistribution of sex” would not produce unambiguous social benefits. To deny these benefits to groups like the disabled, or really to anyone with a physical or emotional inability to find a willing partner, and to insist that sex workers be exposed to danger and abuse, is not just priggish, but cruel.

Multipliers Are For Politicians

02 Wednesday May 2018

Posted by in Big Government, Fiscal policy, Stimulus

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Here’s a major macroeconomic sacred cow among professional economists and the politicians whose fiscal profligacy they enable: the presumed salutary effect of an increase in government spending on economic activity, including its so-called “multiplier effect”. Government fiscal stimulus is prescribed by the Keynesian school of economics to remedy any decline in the total demand for goods. A classic case is “underconsumption”, or excess saving, such that labor and capital resources are in excess supply. The idea is that government will mop-up some of this excess saving by borrowing and spending the proceeds on goods and services, putting resources back to work. In the standard telling, digging holes and refilling them is as effective as anything else. The increased income earned by those resources will be re-spent, creating income for the recipients and leading to repeated rounds of re-spending, each successively smaller due to “leakage” into saving. Adding up all these rounds of extra spending yields a multiple of the original government stimulus, hence the Keynesian multiplier effect. The stimulation of the demand for goods and services pushes the economy back in the direction of full employment, thus correcting the original problem of underconsumption. Nice story.

Keynesian economics is a short-run, demand-based framework that delineates behavior by the constructs of national income accounting, segmenting demand into consumer spending, investment in productive capital, government spending, and net foreign spending (net exports). Except for the limit imposed by full employment, the supply side of the economy and the processes giving rise to growth in productive capacity are ignored.

Within the Keynesian framework, can offer many qualifications to the story of a shortfall in demand to which even a dyed-in-the-wool Keynesian would agree. First, government stimulus cannot have an effect on the real economy at a time when the economy is operating at full capacity, or full employment. The increased government spending will only lead to bidding against other uses of the same resources, increasing the level of wages and prices.

Another qualification within the Keynesian framework is that the leakage from spending at each round of re-spending is made greater by taxes on marginal income, thus reducing the magnitude of the multiplier. In addition, some of the extra income will be spent on foreign goods — another leakage that reduces the multiplier effect on the domestic economy. In fact, this is why multipliers for spending at local levels are thought to be relatively small. The more local the analysis, the more income will be re-spent outside the locality at each round. More fundamentally, private parties should know that increased government borrowing must be repaid eventually. At some level, they know that additional taxes (or an inflation tax) will be necessary to do so. Therefore, their reaction to the additional income derived from government demand will be muted by the need to save for those future liabilities. Put differently, consumers do not view the gain as an increase in their permanent income. That’s essentially the mechanism underlying the “Ricardian equivalence” between methods of funding government spending (government debt or taxes).

In the “real world” there are many other practical problems that lead to ineffectual and even counter-productive government stimulus. One is the problem of cost control endemic to the public sector. Related to this are seemingly unavoidable timing issues. These factors have a strong tendency to make counter-cyclical fiscal programs too costly and too late. There is also the tendency toward graft and cronyism wherever the government spreads its largess. The “perfectibility of man” is certainly not evident in the execution of government stimulus programs. Their economic impacts often become pro-cyclical, or even worse, they become permanent increases in spending authority. More on the latter below.

Deeper objections to the Keynesian framework have to do with its demand-side orientation and the conceit that government, solely by borrowing and spending, can contribute to “real demand” and add to a nation’s output. And even if government spending takes up slack at a time of unemployed resources or excess supplies, it is unlikely to resolve the conditions that led to the decline in private demand. Therefore, even if government stimulus is successful in spurring a temporary increase in actual production and utilization of resources, it is likely to delay or prevent the downward wage and price adjustments necessary to permanently do so.

Recessions are typically characterized by an effort to work off over-investment in various sectors: housing, commercial structures, oil and gas extraction and processing, technology assets, inventories, or factories. Over-inflation of asset values is usually at the root of malinvestment, often accompanied by overinflation of wages and prices. These dislocations do not occur evenly, but the market process acts to correct misallocations and mispricing precisely where they occur. It might take time, but if government steps in to prop-up weak sectors, forgive the economic consequences of mistakes, and place more upward pressure on wages and prices, the dislocations will persist. So again, even if stimulus and the multiplier effect offer a short-term palliative, the benefits are illusory in a real sense. The long-run consequences of failing to allow markets to repair the damage will be negative.

One of the greatest skills that economists should possess is the ability to discern the most plausible counterfactual in a given situation: the world as it would have played out in the absence of a particular event, often a policy initiative. This is a great shortcoming among those who subscribe to the efficacy of government stimulus programs. In the scenario just described, there will be a decline in capital investment, consumption, and saving, but that saving, whatever its level, will still be channeled into capital investments unless the funds sit idle in bank vaults. If the saving is instead absorbed by the government’s effort to fund a stimulus program, even that reduced level of investment will not take place. The net effect is zero! Thus, the Keynesian stimulus and multiplier effect represent a failure of the economics profession to “see the unseen”, as Frederic Bastiat would have put it. Unless government can produce something of value to generate income, perhaps something that improves private returns, it will not contribute to income growth.

Permanent displacement of private capital investment is the most fundamental detriment of government fiscal activism. That it might well supplant private production should come as no surprise. Matthew D. Mitchell and Jakina R. Debnam describe the phenomenon this way:

“The tendency for ostensibly temporary spending to become permanent spending helps explain why policy makers fail to take the Keynesians’ advice when it comes to surpluses. Though governments invariable go into deficit during recessionary periods, they rarely run surpluses during expansionary periods.”

Mitchell and Debnam provide an interesting quote:

“… Richard Wagner and Nobel Laureate James Buchanan concluded: ‘Keynesian economics has turned the politicians loose; it has destroyed the effective constraint on politicians’ ordinary appetites. Armed with the Keynesian message, politicians can spend and spend without the apparent necessity to tax.'”

In a footnote, Mitchell and Debnam note that Milton Friedman once said, “Nothing is so permanent as a temporary government program.” The Keynesian prescription for stimulus allows politicians to assert that they are empowered to rescue the unemployed or those suffering a loss of income. They want you to believe that they can do something. The multiplier gives license to still greater mischief on the part of politicians, because it can help politicians sell almost any pork-barrel project. But continuing government expansion requires that it extract resources from the private economy. That’s true whether the government spends directly on goods or redistributes, and the mechanics of these processes involve additional resource costs. As long as government can borrow private savings, politicians will disguise the true cost of their munificence to constituents. Economists should not be their enablers.