Keynesian Stimulus or sedative

I’ve been watching all the lending and ‘stimulus’ packages being implemented across the Western world. Essentially what a ‘stimulus’ comprises of is a raft of measures to pay off crippling debt for large scale employers. It was tried in the UK to save the Steel and Motor industries in the UK back in the 1970’s along with bouts of printing money and it didn’t work. Our friends down south are in the middle of a very similar exercise, but that’s not working either. This time it’s been the motor and financial sectors in receipt of Government (a.k.a. Taxpayer)largesse. So why isn’t it working?

All very Keynesian. With predictable results. The downturn turns down even further. Inflation up. Unemployment up. Taxes up. Debt accelerating. Yet the big political brains can’t figure out why their economies aren’t recovering. Which kind of makes you wonder about how big their brains really are. They don’t see that the problem exists within the very nature of large corporate or governmental institutions.

Now having worked within the lower levels of local and national government institutions, I’ve seen the root of the problem first hand. It’s not that individual departments aren’t efficient, it’s just that they perform too many conflicting internal functions rather than effectively cooperating. In essence feeding off themselves, delivering very poor bang for buck. Within such structures the cost of non-core business functions like compliance and outreach is immense. Such is the case with public institutions, but because they don’t have to show a profit, only spend a budget, this on-cost is exacerbated tenfold and then some.

There is the mistaken idea that Governments can, like when Dick Dastardly implores his sidekick Muttley to “Do something!”. Well they can, and then again they can’t. The bigger government gets and the more functions demanded of it, the more complex legislation becomes. The more complicated the legislation becomes, the more bodies are involved with ‘Compliance’ of the legislation. The more conflicting departments and agencies are formed to ‘combat’ a specific issue, the worse the issue becomes because of all the issue and human conflict avoidance that goes on within such organisations. All of which eats up money and GDP removed from the productive sector in taxes like a nest of hyperactive mega-termites. Thus acting as a drag on (or even completely undermining) the rest of the economy.

What Keynes discovered, a little late in the day, is that Government eats money. Government does not generate the substance of money, which is the economic activity and value underpinning a currency, except by printing more. Simply printing more money leads to excessive (With the risk of hyper) inflation, businesses closing because the money supply is out of control, and so greater unemployment. Hiring more people in non-productive (e.g. ‘Government’) work only exacerbates the problem.

In 1946, ten days before his death, Keynes was heard to say;

“I find myself more and more relying for a solution of our problems on the invisible hand which I tried to eject from economic thinking twenty years ago.”

Referring to the work of Adam Smith, author of ‘Wealth of nations’. Keynes seemed to have understood, albeit latterly in 1946, that his theories of economic practice were failing. So why do governments still utilise the practices he advocated? Especially when it has been repeatedly demonstrated that Keynsian policies only extend economic downturns rather than aid recovery?

I would argue that the ‘stimulus’ type activity by governments acts only as a stimulus for the public sector, and as a sedative for the private sector it feeds upon.

Where the private sector fails is where more successful people (In both private and public sectors) dehumanise others because they only see them as numbers on a balance sheet. Where it succeeds is treating people as a non-renewable resource, and delivering good customer service. Government can do this too, although not very often, as anyone who has contact with bureaucracy (in general terms) can testify.

Where large institutions and Governments fail is when personal initiative is subsumed to the monolithic implementation of an ever more complicated ‘Rule Book’, rather than successfully addressing specific issues. This is the current situation, and so long as the ‘Rule Book’ mindset remains in place, this will continue. There is too much wastage in the system of large corporate and governmental institutions for it to be otherwise.

Thus will Keynsian policies continue to sedate rather than stimulate economies.

Ivan Reitman once made a movie called ‘Dave’, where one of the characters, an accountant, vouchsafed; “If I ran my business this way, I’d be bankrupt in a month!”. The rest of said hopey changey movie is economic twaddle. Great fun, and one of my all time favourites, but still twaddle.