Saturday, March 13, 2010

The Art of Fiscal Illusion

Keynesian philosophy (KP) would be quite comical were it not for the fact that it’s caused major economic and political imbalances over the last 70+ years. I used to be a Keynesian proponent until I awoke from my deep psychological sleep. It took a while for the deconstruction and re-composition (if you will) of my mental faculties from many years of economic brainwashing. One of the things that prospective (or novice) economists are taught is art of accepting theories and concepts that are contradictory. In other words, cognitive dissonance is the pillar of KP.

The following is a quote from a recent article published in The Economist. Read it and see if you notice anything that particularly jumps out.

The state had to step in during the credit crunch, given the scale of the banking crisis, but this expansion of its scope should be temporary. This is not just ideological bias on our part; economic studies suggest that fiscal adjustments that rely on spending cuts do better than those based on tax rises. Yes, some tax rises may be necessary, if only out of the political necessity of persuading the electorate that the burden is being shared. But tax rises, like Japan’s in 1997, can kill a recovery.

Notice anything…no? Go back and read it again.

So here it is: the fact that either The Economist is confused as to which position to take or accept a contradiction as their foundation of how the world works.

In simple English, this is what they are saying: government intervention was necessary to save the world. Oh, but wait, “studies suggest that fiscal adjustments that rely on spending cuts do better than those based on tax rises.”

The Economists misses the obvious: if one thing is true, it’s opposite cannot be. For example, if they claim that cutting government spending is good, then raising government spending is not good. However, back in 2008/2009, at the height of the bailouts, government spending was skyrocketing. They never explain why they accept spending cuts now but not a couple of years ago.

Followers of KP are being heralded with saving the economy. Major liberal (in terms of economics philosophy) publications, such as The Economist, agree with this assertion. Yet, like most of the Western government, KP is fundamentally bankrupt. It is only a matter of time before this becomes widely evident.

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