Bootleggers and Baptists: XLIX- Keynesianism, Stimulus, and Political Manipulation

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Frequently in economics, the views of a specific theorist are exploited for the interests of various political factions. The most salient examples are economic theorists are labeled as “free market” economists. Conservatives generally celebrate Adam Smith as a defender of unfettered commerce but conveniently ignore his concern for the blight of the poor. Smith was too multidimensional to be distilled to a simplistic bumper sticker slogan. The great F.A, Hayek suffered from a similar syndrome as many Conservative and Libertarian pundits disregard the nuances of his work and paint him as radical. However, there are also instances of the intellectual advances of various theorists being embellished by their opponents for partisan purposes. For example, the moderate and subtle rationalizations of James M. Buchanan are characterized as extreme libertarianism. Nancy Maclean is unacquainted[1] with the work of Murray Rothbard!

The inaccurate framing of economic theory for political interests is not limited to right-of-center economists. Many left-wingers exaggerate the beliefs and postulations of their favored economists, the most conspicuous example being the abuse of John Maynard Keynes [2]. Yes, in the eyes of most Conservatives and Libertarians, Keynes had a flawed perception of market processes. Although, he was not communist. Keynes still had some semblance of a pragmatic filter, which placed constraints on his sanguine view of consumption. Keynes did believe that after the end of an economic downturn, deficits should be eliminated. Therefore, Keynes did not advocate for a policy of perpetual deficit spending, most likely would take issue with the massive debts amassed by the United States over the past couple of decades.

It wouldn’t be outlandish to examine the embellishment of Keynesian economics for political gain from the precepts of Bruce Yandle’s Bootleggers and Baptists (1983) coalition paradigm. A political relationship between various factions of policy advocates where some supports sincerely believe in the normative intention of the policy (the Baptists). In contrast, the tacit beneficiaries (the Bootleggers) merely ride the coattails of the moralistic advocates (either silently or vocally alongside the Baptists). The support for various stimulus policies would have its share of Bootleggers and Baptists to defend “stimulus spending”. The most recent examples are the Obama-era stimulus programs (American Recovery and Reinvestment Act of 2009) and multiple rounds of COVID stimulus allocations. Often, Keynesianism is justified when it becomes politically suitable to do so. The most recent examples of economic stimulus initiatives exemplify this point quite well. This observation becomes more striking when you consider that the convergence of our monetary and fiscal policy has amounted to a hand-selected bastard-breed mutation [3] of Keynesian economics and Monetarism. The conception of this flawed system is being spurred by policymakers trying to select the most politically advantageous characteristics of both economic philosophies.

We could consider the founder of Keynesian economics the Baptist of stimulus spending policies. As Keynes envisioned stimulus spending as being a temporary remedy amid an economic downturn. Despite his good intentions, Keynes failed to recognize the political incentives to politicians, bureaucrats, technocrats, activists, and even ordinary voters; factors that only serve to reinforce one of Milton Friedman’s most enduring dictums “There is nothing more permanent than a government program”. While stimulus initiatives come and go, policymakers still keep implementing them as a remedy to soothe economic turmoil. Stimulus policies were adopted with little regard for the implied discipline advocated for by Keynes. After all, he was still an economist and was not ignorant of the discipline’s conceptual pillars. Stimulus spending is an unsound policy, but he never intended for it to be at the regular disposal of politicians and lawmakers. Dating back to the observations of Niccolò Machiavelli, politics is a game of perception, not one of technical proficiency. Conversely, economics is ideally a positive social science unconcerned with popular opinion.

Moral values always enter the equation whenever we enter the realm of actual decision-making, even in economic decision-making. Unfortunately, the line between economic science and public perception is often blurred, especially by the adroit manipulation of politically savvy elected officials, activists, lawmakers, and activists. Promising ever-larger transfer of “free” goods and services to the voting public. Applying the principles of concentrated benefits and dispersed costs, voters believe they have made out like bandits. Thereby, forming a mutually beneficial feedback loop of voters believing they have won and political actors presented in a positive light; as being defenders of the common man. Elected officials portrayed as advocates for the “little guy” helps establish social currency with the voting public. Social currency dovetails nicely with a politician’s incentive to remain in their position of political power.

Foot Notes:

  1. Maclean is aware of Rothbard’s work to a superficial extent, but if she sincerely understood his work, she would not be portraying Buchanan as a radical.
  2. The author is not an exponent of Keynesian economics.
  3. Despite the intense debate between Keynesians and Monetarists, both have their commonalities.

Cantillon Effect- Income Re-Distribution in Reverse

positive senior businessman typing on laptop while holding money in hand
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The economic havoc wreaked by the COVID-19 outbreak has been felt not only across the United States but all over the world.  The government-sanctioned shelter-in-place orders and other restrictions have brought various sectors of the U.S. economy to a standstill. Presenting a profoundly compelling dilemma. Do we cripple our economy to flatten curve or do we impose few restrictions and allow this highly communicable disease to spread rapidly? The proposition on hand appears to be a lose-lose scenario. However, which is the greater of the two evils is a difficult question to answer. Although not surprisingly, the answer seems to split down partisan lines.

 

One method of temporarily easing concerns of the ailing economy has taken the form of the form of an economic stimulus bill. A stimulus bill of mammoth portions. An unprecedented amount of trillions of dollars have been allocated for the CARES Act relief bill [1]. There is a strong constitutional argument that can be made for providing just compensation for those who have lost their jobs due to the Corona Virus pandemic. Legal experts such as professor F.E. Guerra-Pujol of the University of Central Florida make such arguments. Invoking the Talkings Clause of the Fifth Amendment of the U.S. Constitution to provide a rationale for just compensation for those forced into unemployment by government mandate (Guerra-Pujol, 2020) [2].

 

Unfortunately,  the CARES Act does not exercise the restraint of professor Guerra-Pujol’s wage restoration approach. Rather a direct monthly allocation of  $1,200.00 plus an additional $500.00 for each dependent child for those making under $150,000.00 (the cutoff for joint filers) annually [3]. This is regardless of employment status. Making such efforts a departure from a property rights argument for government assistance.

 

The question becomes why would the government provide money to people who are still working? It seems a little counterintuitive. It based upon one of the chief assumptions of Keynesian economics. If the economy is going to weather inhospitable conditions we need economic activity. The solution is we need to stimulate aggregate demand or consumer demand for goods throughout the economy. The government sends everyone a check with the hope that they will go out and spend it. Spurring economic activity. Trump administration’s stimulus bill in many ways mirrors the stimulus policies of the Obama presidency. Maybe Nixon wasn’t kidding when he famously declared ” We are all Keynesians now” back in 1971[4]. I am not going to refute the efficacy of such policies in this essay.

 

Rather make a relatively obscure observation.  It is quite common for major spending bills to funded by monetary expansion rather than tax-dollars [5].  The reason for resorting to circuitous means of funding remains an open question. The wisdom imparted in public choice theory may shed some light on this question. The concept of fiscal illusion comes to mind. Defined as “… “the notion that systematic misperception of key fiscal parameters may significantly distort fiscal choices by the electorate..” ( SANANDAJI &  WALLACE, 2011, P.1) [6]. In other words, if the voting public experience the expense of raising taxes to fund the stimulus bill it would face visceral scrutiny. Funding through printing more money buries the direct cost of the policy. The average taxpayer does pay for the stimulus, just indirectly.  They pay for it in higher prices and reduced purchasing power of the currency. Nothing in this world is truly free.

 

It should be noted that the introduction of new money is not neutral. It does impact other factors in the economy other than prices.  An observation made by both David Hume and Richard Cantillon back in the 18th century (Humphrey, 1974, P.4) [7]. Beyond that new more is seldomly introduced into the economy evenly.  It is ironic that most advocates of income inequality frequently overlook this premise. Generally, because individuals with such ideological proclivities tend to favor the programs being funded by the new money. If you look a little deeper into the situation it becomes apparent that the uneven distribution of money creates inequalities. Those who have access to the new money prior to prices rising enjoy the benefit without the burden of the decreased purchasing power.  Those who receive the new money later on. Once prices have caught up with inflation have the implicit tax of decreased purchasing power. This occurrence is known as the Cantillon Effect.

 

This observation was first noted in the work of Irish-French economist Richard Cantillon. In his book An Essay on Economic Theory, he expounds upon how those who are closest to the mining industry benefit for the introduction of new precious metals into the economy.

All this increased expenditures on meat, wine, wool, etc., necessarily reduces the share of the other inhabitants in the state who do not participate at first in the wealth of the mines in question. The bargaining process of the market, with the demand for meat, wine, wool, etc., being stronger than usual, will not fail to increase their prices. These high prices will encourage farmers to employ more land to produce the following year, and these same farmers will profit from the increased prices and will increase their expenditure on their families like the others. Those who will suffer from these higher prices and increased consumption will be, first of all, the property owners, during the term of their leases, then their domestic servants and all the workmen or fixed-wage earners who support their families on a salary. They all must diminish their expenditures in proportion to the new consumption, which will compel a large number of them to emigrate and to seek a living elsewhere. The property owners will dismiss many of them, and the rest will demand a wage increase in order to live as before.  (Cantillon, 1755, Tranl. Saucier. Ed. Thoroton, 2010,P. 149) [8].

 

This passage exemplifies the principle behind the Cantillon Effect. Those closest to the new wealth receive the new money first. They benefit from the lag between the introduction of the new gold and the purgatorial period before the increase in the quantity of gold is reflected in prices. If the money was truly neutral we would not witness such effects. The introduction of new money truly does have “… real consequences … production, consumption, and distribution of income…”  (Thornton, 2006, P.6) [9]. If this wasn’t the case we would see prices rise evenly and such disparities would not be of any concern.

 

Since Cantillon’s day, the means of distributing has changed. After all, we are presently on a fiat currency system. It is important to remember that either a precise metal standard or command currency is susceptible to this effect [10]. Obviously, it is easier to manipulate a fiat concern in a manner that increases the aptitude of Cantillon Effects. Clearly, banks and mines were the institutional mechanisms for circulating currency back in the 18th century. In an era of centralized banking and MMT, one needs to look no further than the U.S. Bureau of Engraving and Printing. The modern substitute for the gold mines of our forefathers. In the days of a hard money standard, the gold mines were the point of entry for new money.

Similar to the gold mines, who gets the money first is geographically contingent. Naturally, banks situated near Federal Reserve locations would first receive the money. It is important to remember while the Federal Reserve does not print the money it does exert control on the size of the money supply [11]. There are 12 locations throughout the United States. Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, Dallas, and San Francisco [12]. Definitely favoring anterior and affluent east coast. As well as interior major cities such as Dallas and Chicago which have well known financial districts. The surrounding institutions in these areas may get wind of freshly printed money and the knowledge to spend the money prior to the purgatorial lull before inflation starts impacting prices. Typically, those working in such circles are white-collar workers. Affluent and well educated.

 

Please notice that they opt to not establish any of their offices in Mississippi. Arguably one of the poorest states in the country [13]. This is why it important to not look at economic policies superficially nor ignore their downstream consequences. Many proponents of government welfare may even applaud the idea of printing more money to fund various programs. Often those who these programs intend to help may merely be disadvantaged by the higher prices caused by inflation. Those with institutional connections are ahead of the curve and spend the debased currency. While they have their true savings tied up in the real estate, stocks, and precious metals.  Making them less marred by the effects of inflation. While poorer people tend to have their savings (if any) in a savings account. Completely dominated in the fiat. I don’t begrudge those who are successful. Cantillon Effects are examples of inequality based on government meddling. Rather than the byproduct of skill, savvy entrepreneurship, or adding economic value to society. Those who benefit certainly benefit at the expense of others. They do not benefit on their own merits.