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Patents and Innovation Economics

What do Keynesians and the Flat Earth Society Have in Common?

Both of them are impervious to facts – in others words, it is a religion.  The Flat Earth Society maintains that the Earth is flat instead of spherical despite overwhelming evidence, starting with Eratosthene’s measurement of the circumference of the Earth in 276 BC.  Keynesians continue to insist that government spending stimulates the economy.  If this were true, then  theft should also stimulate the economy.  For instance, Keynesians assert that “food stamps” (now the SNAP program) create economic growth.  If this were true,  why not just steal, since the recipient of the food stamps does not provide anything of value for the food they receive.

Perhaps this is just too theoretical for the true believers, such as Paul Krugman, who are mentally and reality challenged?  Perhaps the empirical results are ambiguous and I am just being too tough on them?  Well it turns out that a number of studies have looked at this issue.  For instance, the study The Size and Functions of Government and Economic Growth, shows that for ODEC countries the growth rate is inversely proportional to percentage of GDP spent by the government.[1] Below are pair of charts from this study.

This bar chart shows the average growth rate of a country versus its spending as a percentage of GDP.

This is a scatter plot that shows the growth rate over ten years of a country versus its spending as a percentage of GDP at the beginning of the decade.

Based on these two charts it appears that the United States’ growth rate is lower than the average for ODEC countries with similar amounts of spending.  My guess is that this is due to  the hidden tax of regulatory burdens and regulatory attacks on property rights.

Austerity Programs

These charts make it unambiguously clear that austerity programs do stimulate growth. However, raising taxes is not an austerity program.  Raising taxes is like a family tightening their budget by asking their boss for a raise or a company cutting expenses by raising prices.  A company that raises it prices as a way to meet its budget during an economic downturn, is likely to see less revenue overall.  In the case of taxes, the government is likely to see less revenue and less economic activity.  The source of economic growth are  increases in our levels of technology.  When people see less of a return or their ideas stolen when creating a new technology, or a business around a new technology, or just investing in new technology for their existing business, they are less likely to undertake this endeavour.

However, the TRUE BELIEVERS of Keynes and Socialism are not interested in evidence. As a result, you can expect President Obama to suggest that more government spending is necessary to grow the economy in his jobs summit/plan  speech in September.  See Biden Say U.S. Needs More Stimulus.


[1] Gwartney, James; Lawson, Robert; Holcombe, Randall, The Size and Functionsof

Government and Economic Growth, Joint Economic Committee, 1998, http://www.house.gov/jec/growth/function/function.pdf .

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August 26, 2011 - Posted by | -Economics | , , , , , ,

4 Comments »

  1. What Keynesians always leave out is the fact that Keynes himself, the inventor of deficet spending, said it doesn’t work without a totalitarian government controlling the price of everything. Which is what we had in WWII. Employers were not allowed to fire emplyees; landlords were not allowed to evict anyone; everything was rationed and prices controlled; and we still needed victory gardens to get by becuase it just doesn’t work. It was meant to control how far the economy falls and the health and wellfare of people but never claimed to be able to grow the economy. The real boom to the economy was the Martial Plan in which we went into a lot of debt to help other countries rebuild after the war. But it was an investment because those countries were then required to allow our products into their countries. Here is a link to the best article I’ve ever read on the subject.
    http://www.independent.org/publications/article.asp?id=317

    Comment by Matthew Artero | August 28, 2011 | Reply

  2. Matthew,

    Interesting article thanks. I believe the Marshall Plan’s effect has been overblown also. See http://www.econlib.org/library/Enc/GermanEconomicMiracle.html

    Comment by dbhalling | August 29, 2011 | Reply

  3. Thanks for the article. I wasn’t claiming the Marshal Plan was awesome for the countries that received the aid; just that it opened up their borders to USA exports and that helped skew people’s opinions that deficit spending is awesome. Speaking of Germany; they are claiming that their economic output already exceeds the pre-crisis level of 2008. The credit is given to technology. It is a good example of the economic teachings you advocate. Here is an article on the subject, enjoy. You can google the name of the author to find similar examples in other articles he’s written.
    http://www.freerepublic.com/focus/f-chat/2722504/posts

    Comment by Matthew Artero | September 2, 2011 | Reply

  4. Matthew,

    Thanks for the article.

    Comment by dbhalling | September 2, 2011 | Reply


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