Defense of libertarian newspaper guy

Here in Caps is my defense of Arthur Foulkes, a local newspaper guy who is accused of being a libertarian. Written in the Tribune-Star forum.


COMMENTS IN CAPS

Flashpoint: Foulkes’ libertarian perspective demands alternative view

In his recent opinion piece on the current state of the U.S. economy, Tribune-Star columnist Arthur Foulkes presents a limited and biased analysis. His extreme libertarian views obscure a balanced evaluation. Since most of us are affected by economic conditions, and since macroeconomics is mysterious to much of the public, a response to his essay is appropriate.

My purpose is to provide readers of the Tribune-Star a different perspective on the nation’s economy and the corrective policies under development.

Foulkes makes three essential points in his essay. First, the “spiral theory” of macroeconomics, on which the Obama and Federal Reserve policies are based, is fundamentally wrong. Second, economic recessions are a natural and necessary corrective tonic that serves to “wash away poor investments” … i.e., they destroy businesses that should never have been established in the first place. Third, macroeconomic expansions (“booms”) that are driven by either monetary or fiscal policies will inevitably lead to “a bust”, i.e. … We would all be better off if the government would just leave the economy alone and let it correct itself.

The “spiral theory” to which Foulkes refers was developed in the 1930s by J.M Keynes in his classic book, “The General Theory of Employment, Interest and Money”. A key concept in this theory is the spending multiplier, which works more or less as Foulkes described.

However, it is a gross distortion to speak of the multiplier effect as a “bottomless downward spiral.” No. Keynes’s essential idea was that declines in spending would be amplified and lead the economy to an equilibrium output below its potential, not a free-fall.

HE DID NOT SAY KEYNES WAS RESPONSIBLE FOR THE SPIRAL THEORY, THUGH THAT MAY WELL BE THE CASE.

Keynes also recognized that, with time, spending and output would recover, and production would be restored to the economy’s potential in the long run, even without any government intervention.

I BELIEVE FOULKES IS SAYING AS THE BAD INVESTMENTS ARE CORRECTED, ELIMINATED, THE ECONOMY WILL RECOVER.


The problem with waiting is that productive resources are wasted during the waiting period, which is characterized by high unemployment and low capacity utilization of installed plant and equipment.

THIS IS JUST MADE UP. FOULKES SAYS WE NEED REAL SAVINGS. THIS WOULD BE OPPOSED TO BORROWING FOR INVESTMENTS. SEE HIS EXAMPLE. SLEEPING MAY ALSO BE A WASTE OF RESOURCES BUT I WOULD LIKE TO SEE SOME PROOF.

Foulkes completely ignores this inefficiency, which corrective macroeconomic policies can address. (Keynes also noted that in the long run we’re all dead.)

IGNORES SOMETHING THAT IS PURE FABRICATION? SOUNDS LIKE A GOOD CHOICE.



Such counter-cyclical macroeconomic policies have been followed since the 1930s. Foulkes’s libertarian philosophy would replace these with the laissez-faire approach that prevailed in the 19th and early 20th centuries. A cursory look at business cycles over the past century shows clearly that their magnitude and frequency diminished after Keynesian macroeconomic policies were adopted. It seems odd to recommend that earlier approach as better.


IF ALL ELSE FAILS, LIE, LIE, LIE. THE GREAT DEPRESSION AND 1969 TO 1980'S RECESSION WERE THE TWO WORST ON RECORD. BANK FAILURES WERE COMMON. BEFORE THE FEDERAL RESERVE, BANK FAILURES WERE RARE. WHAT IS ODD IS THAT PEOPLE LIKE MR. LOTSPEICH DEFEND FAILURE.



Foulkes makes two more fallacious points about this theory. He writes that the “spiral theory” ignores that consumer goods must be produced. This is nonsense and simply not true. He also writes that the theory incorrectly assumes that systemic market failure initiates a downturn, when it is actually caused by a desirable recognition of poor investments.

There are two problems with this. First, the systemic market failure identified by Keynes was not the initiation of a recession, but rather the failure of a market system to maintain, or quickly return to, production at the economy’s potential. Any number of shocks to spending could initiate a downturn; they need not be market failures. Examples include reductions in exports, government spending and investment.

VERY DIFFICULT TO UNDERSTAND THIS. BUT THERE HE GOES AGAIN WITH MARKET POTENTIAL. REDUCTION IN EXPORTS IS A MARKET FAILURE TO SOMEONE WHO BELIEVES IN FREE MARKETS IF THE REDUCTIONS ARE DUE TO SOMETHING BEYOND THE FREE MARKET. GOVERNMENT SPENDING AND INVESTMENT IN THEMSELVES DON'T CREATE DOWNTURNS. 0 FOR 3 MR. LOTSPEICH.



Second, the recognition of investments as “poor” will not necessarily reduce aggregate spending and thus initiate a downturn. Poor investments are consequences of past spending. Future investment spending might be reduced as a result, but more likely it would simply be diverted to different kinds of projects. This is an appropriate correction that markets would promote, but it is not the cause of a downturn.

In short, the correction of investment mistakes that Foulkes asserts is the function of recessions can be accomplished without recessions, and it frequently is.

This is not to say that a recession has no role in sweeping away poor investment. Indeed the process of enterprise destruction is amplified in a recession. However, there will also be many businesses destroyed that are viable when the economy is operating at capacity. They are “poor investments” only during recessions, and their destruction reduces social prosperity. This collateral damage of downturns is selectively ignored by Foulkes.


I BELIEVE WE ARE TRYING TO COVER TOO MUCH HERE. IF TOO MUCH MONEY IS PUMPED INTO THE ECONOMY AND PEOPLE THINK THEY ARE DOING BETTER, TOO MANY RESTAURANTS MAY BE BUILT. DURING THE RECESSION THESE RESTAURANTS MAY DISAPPEAR AS "COLLATERAL DAMAGE" BUT FOULKES WAS CORRECT IN IGNORING THIS AS IT WOULD CONFUSE THE QUESTION.


Finally, it is simply not true that a recovery from recession that is engineered by the government must culminate in a new recession. This is an unsupported assertion. The U.S. has experienced extended periods of economic stability and growth following such recoveries.

THIS DEPRESSION WILL BE EXTENDED. THE GREAT DEPRESSION WAS EXTENDED WITH GOVERNMENT SPENDING. I CAN'T ARGUE THAT EXTENDED PERIODS OF ECONOMIC STABILITY AND GROWTH FOLLOWED SOME RECOVERIES. BUT OF COURSE THE RELATIVE GOVERNMENT SPENDING (STEALING OR TAXING) WAS LESS.


Moreover, government spending for infrastructure (“roads and bridges”) that Foulkes suggests is unwise, usually provides substantial public returns for both households and businesses. While true that we should not build bridges to nowhere, this does not mean all government bridge construction should cease.

I BELIEVE HE USED THE WORD MASSIVE AS IN spend massively on roads and bridges. ALSO, not necessary DOES NOT = SUGGESTS IS UNWISE.


— Richard Lotspeich

Department of Economics

Indiana State University


MR. FOULKES IS A GREAT ASSET TO THIS COMMUNITY. HE CERTAINLY HAS PROVOKED MUCH THOUGHT ABOUT ECONOMICS.