Aerotropolis: Digging Holes Above Ground

While many have asserted that John Maynard Keynes said that the government should pay some people to dig holes and other people to fill them, those aren't exactly his words. He did write a lengthy, convoluted paragraph in his General Theory which conveys the same idea. Keynesian theory asserts that raising aggregate demand is critical to getting markets going again after a recession hits.

The problem with this is that the resources expended hastily in this manner can not be reclaimed in the future for better uses. The unseen effect of present spending is the loss of better future opportunities. Frédéric Bastiat illustrated this point with the broken window fallacy in his essay What is Seen and What is Not Seen. Nonetheless, paying some people to dig holes while others fill them will raise aggregate demand and satiate the short-sighted goals of Keynesian theory.

The St. Louis area has 18 million square feet of empty warehouse space. You can think of a warehouse as an above ground hole.

The Missouri legislature and Governor Jay Nixon are considering a special session for a St. Louis "Aerotropolis" and part of that legislation involves a $300 million earmark for the construction of more warehouse space. With 18 million square feet available, it's absurd to suggest that supply is constrained, so the purpose of these new holes must be a Keynesian boost to aggregate demand.

The irony is that many warehouses in north St. Louis city have been torn down over the past several years. Often eminent domain has been granted by the city and property developers have been given tax incentives to demolish these "blighted" buildings.

Demolishing a warehouse is the above ground equivalent of filling in a hole. Thus we see the completion of Keynes's value destroying, live-for-the-moment theory: tax dollars subsidize the demolition of warehouses as well as their construction and better uses for those tax dollars go unrealized and unseen.

Related articles

• Ed Martin talks about the St. Louis Aerotropolis (rebootcongress.blogspot.com)
• Prediction: The White House Wants Another Keynesian Economist (rebootcongress.blogspot.com)
• Rebuilding, Not Rebranding (showmedaily.org)
• It's Still a Flight of Fancy (showmedaily.org)
• Air Cargo Expert Hammers Aerotropolis Plan in Industry Publication (showmedaily.org)
• Aerotropolis Tax Credits Are Still a Bad Idea (showmedaily.org)
• "You Smell a Rat That's Wrapped in Week-Old Fishpaper" (showmedaily.org)
• Stunner: Both St. Louis Del Tacos Closed Their Doors for Good Last Night (showmedaily.org)
• Why Keynesianism is Attractive (economicnoise.com)

Fight of the Century: Keynes vs. Hayek Round Two

From the YouTube description:

"Fight of the Century" is the new economics hip-hop music video by John Papola and Russ Roberts at http://EconStories.tv.

According to the National Bureau of Economic Research, the Great Recession ended almost two years ago, in the summer of 2009. Yet we're all uneasy. Job growth has been disappointing. The recovery seems fragile. Where should we head from here? Is that question even meaningful? Can the government steer the economy or have past attempts helped create the mess we're still in?

In "Fight of the Century", Keynes and Hayek weigh in on these central questions. Do we need more government spending or less? What's the evidence that government spending promotes prosperity in troubled times? Can war or natural disasters paradoxically be good for an economy in a slump? Should more spending come from the top down or from the bottom up? What are the ultimate sources of prosperity?

Keynes and Hayek never agreed on the answers to these questions and they still don't. Let's listen to the greats. See Keynes and Hayek throwing down in "Fight of the Century"!

Starring Billy and Adam from http://www.billyandadam.com

The Impact of Obama's Stimulus is Federal Control

Graph accompanies WSJ article

Writing in The Wall Street Journal, John F. Cogan and John B. Taylor explain why The Obama Stimulus had no Impact (paid subscription). The entire article is good, but this one line identifies the failure of American Keynesianism:

...the federal government borrowed funds from the public, transferred these funds to state and local governments, who then used the funds mainly to reduce borrowing from the public.

Cogan and Taylor explain why the stimulus has been ineffective; however, they do not explore the broader issues involved. I see two such issues: the grant-writing industry and state balanced budget requirements.

The process of the federal government borrowing funds from the public only to turn around and give those funds to state and local governments has been going on for years. Often, those state and local governments put career "civil-servants" in grant writing sinecures to try and secure federal dollars. In other words, state and local governments spend money on grant writers that might otherwise go to police, fire fighters, trash pickup, or something else, so that states and municipalities merely have a chance to get federal grant money. It's the federal grant lottery—you buy your tickets with state and local dollars and you can only win if you've got a ticket! To increase your chances, just buy more grant lottery tickets! So the grant-writing industrial complex is the first problem.

But that's not the worst of it.

Is your state required to balance its budget? Almost certainly. Every state (except Vermont) has a balanced budget requirement. California will balance its budget. There might be blood in the streets from the rioting that follows, but it will be balanced. In general, I'm a fan of balanced budgets; however, the states are balancing their budgets with the help of a disingenuous actor: the federal government. The feds have no balanced budget requirement, but they do have an insatiable appetite for more power. So what's been happening lo these many years, is that the federal government offers the states money to "fill the hole in the state's budget" while also attaching strings to the money that erode the sovereignty of the states and in so doing the feds effectively allow the states to run budget deficits by transferring those deficits to the federal government.

In other words, the federal government through its profligacy has made state-level balanced budgets meaningless while extending federal control over education, law enforcement, transportation, etc. There may be a role for the federal government to play in education, law enforcement, transportation, but the need at the state level to balance the budget has meant that the discussion about that role is one-way: the federal government tells the states what to do.

Until there's a federal balanced budget this problem will persist. Here are a couple of non-traditional approaches to balancing the budget. First, there's my proposal (written on Talk Like a Pirate Day) to run the government like the Pirate Ship of State that it is. Another option would be to require all members of the House of Representatives and their staffs to be paid out of the country's surplus. This second option is elegant because of both its simplicity and flexibility. In the event that the government needs to run a deficit, Representatives and their staffs would presumably be willing to make the financial sacrifice required and the American people would, I think, respond by passing the plate to provide some remuneration.

Note: In Missouri, about 30% of our budget comes from the federal government according to the 2009 Budget Summary. Missouri's 2009 Budget Summary also indicates that a third of our budget is supplied by "Other". The thing is, "Other" is not itemized. I have heard Missouri legislators assert that 60% of Missouri's budget is supplied by the federal government, so I wouldn't be surprised if federal dollars were routed through the "Other" category.

Related articles

• Is Keynesianism dead? (hotair.com)
• New at Reason: Jacob Sullum on Balancing the Budget (reason.com)
• Democratic Representative Asks, "Why Aren't Tea Partiers As Economically Ignorant As I Want Them To Be?" (24thstate.com)

Forget the Birth Certificate--Is Obama a Keynesian?

Obviously, only America's best and brightest attended the Stewart-Colbert "Sanity" rally.

Another Hayek and Keynes Rap

EconStories.tv reports on the Hayek and Keynes Battle at The Economist’s Buttonwood Gathering:

On October 25th, an audience of financial managers and CEOs, politicians, central bankers and Nobel Prize-winning economists at The Economist’s Buttonwood Gathering were treated to an unusual experience: a live rap battle between John Maynard Keynes and F. A. Hayek.

Michael Barone Channels John Maynard Keynes

In the Washington Examiner, Barone writes that voters fed up with Obama's big, bossy government:

Out on the campaign trail Barack Obama has given us his analysis of why his party is headed for significant losses in the election nine days hence. 'Part of the reason that our politics seems so tough right now,' said the president for whom politics did not seem so tough in 2008, 'and facts and science and argument do not seem to be winning the day all the time is because we're hardwired not to always think clearly when we're scared. And the country's scared.'

In other words, the voters can't see straight.

But maybe it's the Obama Democrats who are so scared they can't see straight.

John Maynard Keynes famously said that practical men of business are usually the slaves of some defunct economist. In this case it seems that practical men of politics may be the slaves of some defunct political scientists and historians.

I think it would be more accurate to modernize that quote like this: "It seems that practical men of politics are usually the slaves of John Maynard Keynes." This is the point I was making last night when I wrote:

Keynesian economics hasn't been working so well largely because governments spend like drunken sailors regardless of whether there's a surplus or not. As a result, the part of Keynesian policy where you're suppose to pay the debt down never actually materializes, thus, it has become our road to perdition.

I've heard repeatedly this political season that both Democrat and Republican economists agreed on the bailouts and supported the stimulus. Of course they did—they're all Keynesian economists!

Krugman Says "We Need More Spending!"

The Telegraph's title for their post reflects my sentiments too: Will someone please shut Krugman up:

Sorry, a bit late on this one, but I see old Kruggers, Nobel prize winner and New York Times columnist, is at it again. Not content to lecture his own country’s administration about how they are not spending enough, Professor Krugman lambasts Britain’s coalition government in his latest column for its deficit reduction plan, which he reckons will condemn the UK to a depression.

Keynesian economics hasn't been working so well largely because governments spend like drunken sailors regardless of whether there's a surplus or not. As a result, the part of Keynesian policy where you're suppose to pay the debt down never actually materializes, thus, it has become our road to perdition.

The Wall Street Journal: The Keynesian Dead End: "...the larger story is the end of the neo-Keynesian economic moment, and perhaps the start of a healthier policy turn..."

Megan McArdle: "Random thought of the day: what if Lord Keynes was right . . . but only in 1932?"

Keynes vs. Hayek

Gerald P. O'Driscoll in The Wall Street Journal Keynes vs. Hayek: The Great Debate Continues:

The debates raging over what policies will pull the U.S. economy out of its Great Recession replicate one that occurred during the Great Depression. Thanks to the efforts of Richard Ebeling, a professor of economics at Northwood University, we have compelling and concise documentary evidence. He has unearthed letters to the Times of London from the two sides that mirror today's debates.

...

Prof. Ebeling's rediscovery of these letters has unleashed a torrent of comments on blog sites. As New York University economist Mario Rizzo put it, "The great debate is still Keynes versus Hayek. All else is footnote." Economists have clothed the debate with ever greater mathematical complexity, but the underlying issues remain the same.

Was Keynes correct that savings become idle money and depress economic activity? Or was the Hayek view, first articulated by Adam Smith in the "Wealth of Nations" in 1776, correct? (Smith: "What is annually saved is as regularly consumed as what is annually spent, and nearly in the same time too.")

Is all spending equally productive, or should government policies aim to simulate private investment? If the latter, then Mr. Obama is following in FDR's footsteps and impeding recovery. He does so by demonizing business and creating regime uncertainty through new regulations and costly programs. In this he follows neither Hayek nor Keynes, since creating a lack of confidence is considered destructive by both.

Finally, is creating new public debt in a weakened economy the path to recovery? Or is "economy" (austerity in today's debate) and thrift the path to prosperity now, as it has usually been considered before?

The debate rages on because the answers to those questions are not settled.