Keynes Was Right

Majorska Vodka, a nasty distilate one notch above radiator fluid, is the liquor of choice among the welfare and food stamp crowd.  Read on to find out why even welfare clients who spend all their money on cheap booze help stimulate the economy and create jobs for the rest of us.

I was reading an editorial in the Trentonian a few weeks ago that I thought was interesting.  It said that it was their opinion that the government can't create jobs by spending money (although many economists would disagree).

Well, they're right about one thing.  Many economists, including this one would disagree with the above statement.  But before I go ahead and attack it, I think it is important to explain first what I think the Trentonian is trying to say.

According to the paper (and many conservative Republicans), jobs are created by businesses, and businesses can do this best if the rich (who own the businesses) are allowed to keep as much of their money as possible.  Therefore they advocate minimal taxation of the rich because they are America's job creators.

They claim that once the government takes in money through taxation and spends it, it is gone in much the same way your paycheck is gone if lets say you spent it on a trip to Paris.  The spending is only productive to the extent it goes toward purchasing capital goods such as machinery which can be used to produce future wealth.  And for the most part, the type of spending that the government does (such as welfare benefits, Social Security or unemployment compensation) is pure consumption and the money is destroyed just as soon as it is spent without any further benefit coming from it.

What's wrong with this picture?  For one thing, when money is spent, so long as it is spent here in America, it creates a "multiplier effect".  What this means is that even money spent on welfare benefits creates jobs.  Why?  The poor spend every dime they get their hands on because they are poor and need stuff.  Let's say Joe Welfare Recipient goes to the liquor store and spends his whole check on Majorska Vodka (an American product).  The liquor store gets to keep the difference between the wholesale cost of the vodka and what they sell it for.  Some of this money is used to pay the liquor store clerk, some of it is used to pay for upkeep of the building and property taxes (or for rent if the store is rented). And the rest of the money goes to the liquor distributor which uses it to pay its staff, pay for equipment and buildings and provide a profit to the distributorship.  Finally, the distributor doesn't get his liquor for free either, so some of the money goes to the distillery which uses it to pay for materials, wages, equipment and business profits.  So even a frivolously spent welfare check helps create good private-sector jobs and provides additional business to private sector companies.

And what about the part that only private businesses are capable of producing productive wealth.  Consider the case of Josef Stalin.  This Soviet dictator was a ruthless, uncompromising Communist who opposed private ownership of even the tiniest businesses.  He also didn't give a darn for individual rights or individual happiness.  He'd lock up common people for the slightest infraction (such as being late to work by 5 minutes) so he could get a steady supply of free labor at his prison camps, which produced a variety of products ranging from roads and canals to cameras.  And Stalin was responsible for bringing a medieval nation into the 20th century and turning it into a world power in three short decades.  So much for the theory that the government can't create wealth.

The GOP likes to claim that Keynes was wrong because the New Deal programs did not bring the nation out of the depression.  All this meant was that the New Deal stimulus was not big enough.  For when World War II started and government spending accelerated, the nation was propelled into several decades of unprecedented prosperity.  And the social utility of war is probably even less than Keynes's famous example of hiring men to dig holes in the desert and filling them in.  Even destructive spending can provide economic stimulus if the money is used to pay wages to workers who would otherwise not be employed.