Skidelsky is wrong to admire Keynes

Robert Skidelsky’s had this article published in FT, June 10 on page 9. 

In the article, he claims that Keynes, the intellectual behind big government intervention, is some kind of moral guru as well. 

The article really bothered me in being so utterly false. While I don’t know whether Mr. Skidelsky is trying to mislead his readers, or he is just misinformed. I personally think that he is misinformed, but it’s surprising to see someone who is a professor emeritus of Political economy have such skewed ideas on economics nonetheless. 

I will deconstruct and refute the main points of his article.

He claims that in economics there are no decisive battles. That is true, and the reason is because bad ideas keep coming back. 

Friedman in reason:

Quote:

Reason: I read an article recently in the Washington Monthly that repeated all the silly ideas about inflation that you've been fighting your whole career. Are battles like this ever won?

Friedman: No. All battles are perpetual. You go back in the literature of economics, and you'll find the same kind of silly statements 100 years ago, 200 years ago. And you'll find the same sensible statements the other way.

End quote.

Mr Skidelsky is definitely on the side of silly statements.

He claims that the proof that free markets are not self regulating came about as a result of the Great Depression. The fact is that the Great Depression got its scary name due to government hyper-intervention. Without government intervention, the depression would have been a deep, much shorter recession. The government introduced wage controls, decreased the amount of money in circulation and helped labor cartelize. Additional restriction to commerce between state lines were raised. Protectionist efforts were increased.

There is no doubt that bubbles will form on a free market. However, smart people will arbitrage other citizens’ herd behavior and keep the bubbles small. In order to have a massive bubble that can destroy tens of trillions of dollars worldwide, you need significant government intervention.

While Britain might be in better shape financially than US, it’s worth noting here that FDR’s reckless policies (Social Security) created the huge unfunded liabilities of the US government. Any institution operating on the free market with this ratio of liabilities to income would be bankrupt in no time. The only reason the US government is still solvent is because it has something no business has: the monopoly on taking money from citizens that live within its borders.

With respect to the policies that government pursued to produce “full employment” one must be really blind not to notice the perverse incentives the government provided some of its less fortunate citizens. High marginal taxes (partly due to quick withdrawal of cash incentives of being poor), are estimated to being over 100% in Canada for a certain income range (according to a National Post article). This is the poverty trap that keeps the poor poor and unwilling to work.
With respect to printing money or other fraudulent methods of “stimulating” demand, Milton Friedman proved decisively in the late ‘60s that an increase in the aggregate demand will only shift the real aggregate supply curve temporarily, while the price level increases to absorb the extra liquidity. An extra stimulus would be produced only by increasing the monetary mass at even increasingly faster rates. And so eventually a loaf of bread becomes a few billion dollars as in Zimbabwe.
Not only this, but other economists like Paul Ormerod showed that the Phillips curve is not a static relationship, but it is dynamic. Once inflation starts it goes spiraling up and you can have high inflation and unemployment at the same time. Remember the ‘70s?

The fact is that government intervention in monetary issues is very damaging. The fact is that temporary increases in liquidity can in principle keep the ball rolling. But as Milton Friedman said, there is nothing as permanent as a temporary government program. No government would dry the extra liquidity in time to starve inflation.
Additional problems appear when a structural deficit appears. Looking at the standard of living in France, one can observe that the standard of living decreased in the last 30 years because the disposable income decreased with increasing taxes. And these taxes appeared in order to create “temporary” programs to “jump start” the economy.

The reason why Keynes’ multiplier is less than one if not negative is very simple. In order for the government to provide funding for it’s so called expansionist programs (without printing money), it must tax the citizens. Now we all know that the government does not get a fixed proportion of its citizens’ income. No. It takes a higher proportion from those who know how to make money and a smaller proportion from those who don’t. The money is spent in uncompetitive ways by its workers and administered by bored underachieving bureaucracy.

For example, look at healthcare in the US. Since 1946 the cost per patient per bed in the US adjusted for inflation went up 40 times!!!! Milton Friedman blames most of it on Medicare and Medicaid.
Also looking at US government education, in the 1970s, US had some of the highest graduation rates and highest quality. In real terms, cost per pupil went up three times, while nobody in the world can consider the quality of US education world class. In terms of dollars spent only Switzerland spends more (but also achieves more). 

So according to Skidelsky taking money from those who make it, spending it badly on failed programs in order to get votes from the lower income citizens produce “growth”. Are you kidding me?

In another paragraph he discuses the financing of the deficit. First of all, financing any deficit would be very easy if there was no debt. However, the “temporary” programs become permanent. This way the current generation steals from their kids and grandkids.
But since we live in the “real word”, we know there is a lot of debt around. What is damaging about this is not only that this massive debt will diminish actual private investment. It also means that that future taxes will have to increase to pay for the future debt. This has a chilling effect on any hard working citizen. Future tax increases will make work even less desirable. 

In the last paragraphs of his article, Skidelsky states that the “Keynesian Revolution” was a triumph not of good science over bad science, but of good judgement over bad judgement. It seems to me that his article and his ideas are a joke to any thinking man (and despite his Nobel, I don’t think Krugman is a thinking man). The sad thing is that bad false ideas pioneered by some dead economist keep being perpetuated by individuals who don’t bother to look at the facts. And that has to stop. And the Keynesian Revolution must stop before the government bankrupts and enslaves us all.