Craig Pirrong on Intertemporal Consumption

Craig Pirrong explains the Keynesian system, which he aptly describes as “bilgewater economics.”

At root, stimulus advocates appear to be substituting their preferences for those of the great unwashed. People want to save too much, the bastards. If we give them money, they’ll STILL save it. So, we’ve got to consume for them. Traditional Keynesians attributed this demand to save to “animal spirits”—i.e., irrationality, or perhaps, insanity. Maybe modern Keynesians are of the same view.

Whatever the rationale, it is fundamentally elitist, and anti-individualist. It is the attitude of those who know what’s good for us. They’re from (or for) the government and they’re here to help us. And we all know how that usually works out.

I suggest it’s better to start from a presumption that people aren’t idiots, driven by irrational impulses, and to try to understand the reason for their behavior. A substantial increase in the demand to save—i.e., to transfer consumption from the present to the future—likely has a rational explanation. Like, oh, I don’t know, maybe an incredible increase in uncertainty associated with the potential implosion of the financial system. Just a guess. But the stimulus advocates, the neo-Keynesians, argue that people have things exactly backwards, and just don’t know what’s good for them. What they REALLY want, the NKs are saying, is to consume more today and less tomorrow—even though through their behavior people are revealing the exact opposite. The arrogance of this is pretty mind blowing.

This further strengthens my belief that the stimulus is akin to identity theft. People borrowing in our name to do what they want, not what we want.

Craig has this exactly right. Let’s not forget that Keynes himself, and his Bloomsbury pals, were among the great elitists of their day. Keynes thought that all the world’s problems could be solved by turning all decisions over to a few Cambridge men, with himself in charge. So we should hardly be surprised that the essense of Keyensian economics is exactly this, the substitution of the state’s expenditure, savings, and investment preferences for those of ordinary people. Craig goes on:

You can make arguments as to why moving consumption from the future to the present is constrained (relative to some ideal, first best world.) For instance, it is costly to use human capital and future labor income as collateral for borrowing. You might also argue that the problems in the banking system have also made it impossible to consummate some welfare-improving trades.

But, to argue that the government has the ability and incentive to identify and fix the distortion in intertemporal consumption, you have to presume that it can solve the knowledge problem and the political problem. That is, it must have the ability to determine what the preferred consumption pattern is (which would require immense amounts of information about individual preferences and technological possibilities) and the political mechanism must be able to translate that information into efficient action. Color me skeptical. Extremely.

Government is essentially a gang of thieves. Add identity theft to its list of crimes.