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Winnipeg Free Press - PRINT EDITION

Keynesian principles have been misapplied for 3,000 years

By: Sid Green

Posted: 02/5/2009 1:00 AM | Comments: 0

Over 3,000 ago, the pharaoh of Egypt had dreams which envisioned seven lean cows devouring seven fat cows and then seven barren ears of corn consuming seven healthy ears.

The pharaoh was troubled by these dreams and his own soothsayers could not interpret them. The pharaoh learned that a Jewish prisoner named Joseph could interpret dreams and the pharaoh called for him. The pharaoh described the dreams to Joseph, who gave the following interpretation:

The two dreams were really only one. The seven cows and the seven ears of corn were years to come. The dream forecast seven years of plenty followed by seven years of famine.

The years of plenty would be undone by the years of famine, with resulting great misery and hunger. In order to prevent this disaster, Joseph recommended the pharaoh should gather up during the years of plenty a share of the food that was produced so that it would be available to the people during the drought years.

Joseph was appointed to be the administrator of pharaoh's land and his advice was taken. His predictions proved accurate and the implementation of his policy saved the Egyptians from disaster.

Such is the first historical record of what has come to be known as one of the fundamental principles of Keynesian economics.

John Maynard Keynes was a complete opposite to his predecessor Joseph. Whereas Joseph was a Jewish prisoner, Keynes was the consummate English establishment academic aristocrat. Educated at the best English schools, he was to make a name for himself in the fields of government economic and fiscal policy.

He was the darling of left-wing liberals and paved the way for government intervention in the economy, to the dismay of the conservatives, who advocated fiscal responsibility, a balanced budget and the avoidance of deficits and deficit financing.

One of the basic principles of Keynes was that governments should impose and collect taxes during periods of buoyant economic activity and then use the surpluses collected to engage in stimulative government spending during less prosperous times.

It will be noted that Joseph's theory would work only if prosperity came first, followed by recession. If hard times came that were not preceded by surpluses, there would be no stored food to deal with the famine.

The difficulty with the Keynesians I have seen in action is that they follow their principles with only half the equation. They are always willing to spend because, no matter how good things are, they can always be better. I have yet to see them identify the good times when taxation should be imposed to prepare for leaner years.

What we are now witnessing in Canada and the United States is Keynesian economics run wild. In answer to the economic collapse, these two North American governments are engaging in massive spending programs. Not only are they not raising taxes to pay for these programs, they are reducing taxes at the same time, thus guaranteeing an increase in the operating deficit, with the inevitable and consequential increase in the public debt.

When the public debt is increased, the cost of financing this debt is automatically added to the operating budget, aggravating the problems.

There are no sound economic or fiscal principles on which these courses of action can be justified. No government has ever successfully spent itself out of a recession without imposing taxation to pay for its expenditures.

People forget that Roosevelt's New Deal did not defeat the Depression in 1933 and did not succeed even though some of the expenditures were financed by taxation. The Depression was still with us in 1939 and it wasn't until the war that economic recovery actually took place. Even then, governments in the West imposed taxes to pay for their war expenditures.

The fact that the Canadian spending program is being instituted by a Conservative government gives testimony to just how much Prime Minister Stephen Harper must have been unnerved by the coalition threat. All principles have been abandoned and the sole objective of the government is to stay in power. Harper may achieve that objective, but the price he will pay is the adoption of a remedy that will not cure the disease.

Sidney Green is a Winnipeg lawyer and former NDP cabinet minister.

Republished from the Winnipeg Free Press print edition February 5, 2009 A13

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