Republicans Just as Guilty of Flawed Keynesian Thinking
The core of Keynesian economic policy is that the government must come in and replace reductions in private sector demand with public sector demand, therefore bringing overall demand back to its previous level. One of the many flaws in this thinking is in assuming that the previous level of demand was “correct” and getting us back to that level is the appropriate policy response.
Take the example of the housing market and the government response. The primary response of Republicans in Washington has been to offer tax credits and other incentives to replace the drop in demand for housing. Witness Senator Johnny Isakson’s recent comments on why we need to extend the $8,000 homebuyer tax credit: “If you take that kind of business out of what’s already a very weak housing market, you do nothing but protract and extend the recession.”
This analysis could not be more wrong. The tax credit largely acts to keep housing prices from falling further. However, that is how markets are supposed to clear in an environment of excess supply. If there’s too much housing, the way to address that is to allow housing prices to fall, which attracts buyers back into the market.
We should also recognize that the tax credit does not help the buyer, it helps the seller, by allowing the seller to charge that much more for the price of the home.
National Defense, Keynesianism, or Just Pure Rent-Seeking?
Sen. Johnny Isakson (R-GA) is fighting hard to maintain production of the F-22 Raptor fighter jet, which happens to be made by Lockheed Martin in Marietta, Ga. But Isakson insists that he’s not fighting for the plane just because it’s made in Georgia. No, he tells NPR, it’s important to recognize that it’s actually made by 90,000 workers in 49 states, and you don’t want to lose those jobs at a time of high unemployment.
In a letter to President Obama, he spelled out his argument, albeit with slightly different numbers:
Over 25,000 Americans work for the 1,000+ suppliers in 44 states that manufacture the F-22. Moreover, it is estimated that another 70,000 additional Americans indirectly owe their jobs to this program. As we face one of the most trying economic times in recent history it is critical to preserve existing high paying, specialized jobs that are critical to our nation’s defense.
To be sure, Isakson does insist that the plane is vital to national security, an argument that Defense Secretary Robert Gates and Cato’s Chris Preble challenge. But it doesn’t say much for Republican arguments against President Obama’s wasteful spending when Republican senators argue that we should build a hugely expensive airplane as a jobs program.
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