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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