Jay Carney’s Castles in the Air

“Great minds think alike. So do drunken carnies with corn dog sticks and the chance to shank you.” – unknown

White House press secretary Jay Carney trotted out a wonderful bit of Keynesian nonsense this week when pressed about extending unemployment benefits. The full video is here:

The question, posed by Laura Meckler of the Wall Street Journal: “I understand why extending unemployment insurance provides relief to people who need it, but how does that create jobs?”

Carney’s response: “It is one of the most direct ways to infuse money directly into the economy because people who are unemployed and obviously aren’t running a paycheck are going to spend the money that they get. They’re not going to save it, they’re going to spend it. And with unemployment insurance, that way, the money goes directly back into the economy, dollar for dollar virtually.”

Horse-hockey.

Forget about  dollars for just a second. Forget about any form of coinage or money or credit. There are two things in the economy to consider: production and consumption. Of course, the second is merely a byproduct of the first. That is, what is produced is consumed. Farmers grow corn and people eat it. Builders build houses and people live in them (whether renting or buying). Janitors clean bathrooms and they are clean – they are consumed (or consumption is started) almost immediately.

We usually measure economic “goodness” in Gross Domestic Product (GDP). Despite the fact that government statistics are unreliable and flawed, the measure is still a measure of production.

We use money for two things. First, it is a medium of exchange. It’s hard to always trade bushels of corn for houses, so we use money as the middle man. Next, we use it as a store of value. If I have produced more than I intend to consume today, I can allow someone else to consume my excess production and store that production in the form of money, which I will use tomorrow to consume. In both ways money serves to add fluidity and efficiency to the market … and nothing more.

The Keynesian notion that spending helps drive the economy is to say that consumption will spur production. This is exactly backwards. “The only reason people aren’t producing is because people refuse to consume.” Really? They usually put it in more sophisticated terms – “the economy is struggling because of insufficient demand.” Ummm, no.

Demand is infinite, all the time. People want everything – they just may not want it for a certain cost. The Keynesians then hold that the economy suffers because the free market has determined a different price point than the one that existed yesterday. The entire philosophy is fundamentally disdainful of freedom. It holds that free people choosing to produce or consume in accordance with their desires “get it wrong” and must be cajoled into producing or consuming different things and in different quantities.

And what sense does it make, in regards to unemployment benefits? We will take production from one and allow it to be consumed by another who did not produce it. This, will in turn induce the producers to produce more … WHAT!? How exactly does taking production from one induce him to produce more? What incentive does he have if he will not be allowed to consume what he produces? The answer is simple – none.

(It’s not unlike the TARP bailout, where money was taken from taxpayers, given to banks, in order to get banks to lend back to taxpayers. How exactly does this help the taxpayers?)

Does giving money from one to another cause short-term changes in the economy? Of course. Does it possibly induce greater “activity” and perhaps even a few more jobs at the front end? Probably. Does it produce anything that is long term or efficient? No. Does it produce anything other than a false signal to the market, a distortion, or a mis-allocation of resources? No. They simply sow the seeds of the next collapse.

Argue for unemployment benefits on moral grounds all you want, but to argue for them on economic grounds is silly.

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One Response to Jay Carney’s Castles in the Air

  1. Nick says:

    I wanted to point out what I thought were a couple of errors in logic here, as I work in finance and am fairly versed on some of these issues. First of all, I’m all for poking holes in Keynesian theory, what is in vogue should always be questioned, but there are some fundamental mistakes here.

    I believe the author here is using the distinction between ‘production’ and ‘consumption’ here in an equivocal manner. Consumption accounts for 70% of US GDP. It can seem counter-intuitive, but production and consumption is not a zero-sum game. For lots of reasons, but primarily the existence of the capital markets (i.e. the ability to lend from banks and investors), lend to the fact that we can continually increase out consumption while increasing our production as well, leading to wealth generation. Consumption is not simply a by-product of production, but can also be a generator for production.

    Demand is not infinite at a $0 price point, it is determined by the utility of the good. I love milk-shakes, but if I have 10 in one sitting, the relative utility of the 10th versus the 1st is greatly diminish. In fact, the utility of the 10th milkshake is probably negative because it would make me vomit. I would probably pay the vendor to let me not have the 10th milkshake. Free markets are not always efficient and are commonly inequitable. Neither of those factors is necessarily a bad idea, but the Keynesian argument is that at certain conditions market inefficiencies and inequities result in price/quantity levels that create deadweight loss. The key here is that free markets are rarely perfectly efficient (ignoring what is equitable for now) in the real world.

    Unemployment taxes ARE in fact meant to be a transfer of payments. That is to say, the goal is for the government to take money out of your pocket and put it in someone else’s. The idea is to move money from those with a higher propensity to save (i.e. the employed) to those with a high propensity to consume (i.e. the unemployed), because there is the different habits between those taxed and those benefiting. The idea is, that when there is a recession and large amounts of lay-off’s, moving money to those recently fired increases consumption therein increasing GDP (see above) which acts as a automatic stabilizer and reduces the momentum of the recession.

    Now, there are certainly solid arguments against specific ideas like extending unemployment benefits for those who have been drawing on them for over 26 weeks. Are they just drawing unnecessarily from the system? Are the truly still part of the labor force (i.e. job-seeking)? Has there been a structural change in the economy that has left them unqualified for the available jobs? Wouldn’t an efficient free-market tend to find work for them at lower wages levels (the work no one else wants to do)? Do we want to cast them aside and essentially let them starve? It’s a difficult issue but one that merits discussion. However, as a whole the economic effects of unemployment benefits as automatic stabilizers are pretty well proven.

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