Keynesian economics is better than Austrian economics for the US economy

The Broken Window FallacyEconomics, because of its nature to work with institutions that yield significant amounts of power, is a discipline that has a number of fallacies. One of them is the broken window fallacy, or the tendency for economic policies to be judged only on their short-term and immediately foreseeable consequences. As Henry Hazlitt puts it, however, "The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups. " Government stimulus is one of the prime examples of how this fallacy is rampant in economic policy. [1]My opponent commits this fallacy often, and so does Keynesian economics. Government spending has to come from somewhere. Increased government spending requires that taxes be increased, which means that consumption has to decrease. Keynesians came up with the multiplier to show that government spending would increase the GDP more than consumption. However, "The theory (a simple Keynesian macroeconomic model) implicitly assumes that the government is better than the private market at marshaling idle resources to produce useful stuff. " This makes little sense. The government, divorced from the everyday economic interactions people have, should not be better at distributing resources than those taking part in the interactions themselves. At best, government spending is the same as consumption, but in the real world, it's probably worse. Government spending only drags down GDP. [2]Government stimulus also leaves long-term costs that that outweigh the short-term "benefits": "Finally, any attempt at “stimulus” leaves a long-term cost after any short-term benefits have long dissipated. .. fiscal deficits have only a short-run expansionary impact on growth and then become negative. Thus, constantly increasing deficits result in persistently low economic growth and an exploding ratio of public debt to GDP. " The reserve currency argument relies on the short-term situation being a guide to the long-term. The massive debts the US are incurring are not sustainable, even if the US dollar does remain the world's currency (which isn't plausible). In fact, Paul Krugman himself has criticized the argument that the US can run persistent trade deficits simply because the dollar is the world's reserve currency. This is no way to continue. [3][4]There are two responses to the inflation argument. One, there may be something else more important than government spending controlling inflation (like the current state of the economy). And two, inflation is underestimated because it leaves out various things. Take a look at this chart here: [5]Energy and college tuition are left out of the CPI. Even more tellingly, the three industries with the three biggest increases in the CPI are energy, medical care, and college tuition, all of which the government has had a big stake in in recent years. When things like apparel and recreation are considered (that have little subsidy from the government), inflation is much lower. Heavily government-sponsored industries incur much higher rates of inflation than less government-sponsored industries. The Government cannot create capital or wealth - all that government does in enacting a stimulus bill is divert capital from more efficient enterprises to less efficient enterprises under the guise of "increased spending", when the real importance is in increased capital. Further, it follows that for every job the government "creates", another job is lost. Overall, at best, stimulus can only achieve the same level of output as if private industry had been allowed to work; and most likely, the government's stimulus will be less efficient, meaning that the recession will be worsened instead of improved. Deficit SpendingI mentioned in my first argument that recessions are the result of a loss of capital in an economy, and that saving is the way to re-establish capital in an economy. "Recovery will be achieved by the combination of more saving, capital, and credit along with lower wage rates, costs, and prices. In addition, recovery requires the rapid liquidation of unsound investments. "[6]What government stimulus does is further reduce the amount of capital in the economy when the cause of the problem is too little capital to begin with, the result being that the recession is worsened. "The reason that stimulus packages cause a further loss of capital is that their starting point is the consumption of previously produced wealth. That wealth is part of the capital of the business firms that own it. The stimulus programs offer money in exchange for this wealth and capital. But the money they offer does not come from the production of any comparable wealth by the government or those to whom it gives money - wealth which has had to be produced and sold and thus put into the economic system prior to the withdrawal that now takes place. The starting point for the government and its dependents is an act of consumption, which means a using up, a loss of previously existing wealth in the form of capital. .. any fresh production and employment that results [from government stimulus] is incapable by itself of replacing the capital that was consumed in starting the process. "[6]Going back to the broken window fallacy, government spending doesn't help to restore employment either. The jobs that the government creates can only be created at the expense of already created jobs: "Any jobs supposedly created by the government are actually stolen by the government from someplace else or sometime else. That is, the government can create jobs in an industry through subsidizing it, but jobs will be lost in other industries not receiving such beneficial treatment. Government deficit spending that creates jobs now comes at the expense of fewer jobs during the times when the government runs a surplus. Jobs are shifted through time, but over time there is no net gain. "[4]Finally, when the evidence is looked at, government stimulus doesn't seem to do a good job anyway. Take, for example, the most recent recession. ". .. The administration’s promise that the [ARRA] would keep unemployment rates from reaching 8.8 percent and would create some 3 million jobs - 90 percent of them in the private sector - did not materialize. " Further, "From 2008 to 2009, the ratio of the deficit to Gross Domestic Product (GDP) rose from 3.2 percent to 9.9 percent. This 6.7 percent massive dose of fiscal stimulus represented the largest deficit burst since 1942. .. . If demand-side stimulus worked, the economy’s growth today should be China-esque. " But, it hasn't. It has been the slowest recovery in modern (post-WWII) history. "[7]ConclusionGovernment stimulus does not work very well at restoring the economy after a recession, as it doesn't allow for the restoration of capital. It also commits the broken window fallacy. Because Keynesian economics relies on this, it only makes sense that Keynesian economics is invalid. Austrian economics gives the economy what it needs. Sources[1]: Hazlitt, Henry. Economics in One Lesson. [2]: . http://www.wsj.com...[3]: . http://www.forbes.com...[4]: . http://krugman.blogs.nytimes.com...[5]: . http://www.zerohedge.com...[6]: . http://mises.org...[7]: . http://reason.org...