Feedbackers Against British Keynesian Schemes
By Staff News & Analysis - March 11, 2013

Business leaders press for measures to boost construction … Business has called for "radical" measures to boost growth and restore confidence in the Budget, with tax cuts for companies and a push on infrastructure. Business wants the Government to push on with building projects … Employers group the CBI, the British Chambers of Commerce (BCC), and manufacturers organisation the EEF have urged the Government in their Budget submissions to step up efforts to get building projects started, on housing in particular. The CBI and the BCC have also pressed for a cut in business rates and new efforts to back Britain's exporters. – UK Telegraph

Dominant Social Theme: If you build it, they will come.

Free-Market Analysis: How did Britain arrive at this place? A leading business group, the British Chamber of Commerce (BCC), calls on the government to spur the building trades by funding 50,000 houses.

This provides us with two examples of economic illiteracy. First is the idea that building a certain amount of product will provide an economic boost. Second, that government funding is the appropriate methodology of funding.

Say's Law provides us with the insight that sometimes the product itself can spur demand. But if BCC officials were correct about their prescription for prosperity, business would be easy enough to create and pursue. Government bureaucrats could simply print money, pay for products and then sit back and watch the economy grow.

The Telegraph article (excerpt above) has no particular comment to make on this novel way of creating economic success. It simply presents the proposal as if it were yet one more option – and perhaps a viable one. Here's more from the article:

"Although the BCC continues to support deficit reduction, a point may come soon where deficit reduction becomes impossible in the absence of sustained growth," it said. "The Government may have to consider major cuts in business taxation and other radical measures, such as massive infrastructure pump-priming, if growth does not improve."

In the first instance, the Government should shift government spending from unproductive areas, the business groups said. The CBI unveiled a package to "build confidence among businesses and consumers" that would cost £2.2bn. It said the funds could be found by making "efficiencies" elsewhere, but declined to be any more specific.

Central to the CBI's growth strategy was a plan to spend £1.25bn building 50,000 affordable homes, which it claimed would create 75,000 jobs in the hard-hit construction industry. Subsidies for refurbishment of existing houses would only cost £500m, it estimated, and would generate another 80,000 jobs.

This is simply more Keynesian theory justifying big government interference in the marketplace. The idea that government can endlessly substitute its own collective judgment for what the marketplace demands has been enshrined as wisdom by a mainstream media that is apt to regurgitate the most economically dubious information. Where is the evidence that such pump priming is actually effective? Have we missed something?

What is positive in the article comes not from the report itself but from the feedbacks below it, where readers seem to recognize instinctively that programs creating artificial supplies are probably doomed to failure.

James01 writes a skeptical feedback mentioning that getting the economy moving again may not be so simple as building new houses. "Spain did that, remember? Now they have a million new homes unsold and whole estates of them completely empty of residents. There is no point in building homes if they are not going to be purchased."

He also points out that, "House prices are still way over valued. The long term mean is 3-4 times the average gross salary, which, at around £30K, gives and average target value of £120K . Currently they are at £160K so there needs to be a reduction of 25% to get back to the true values. Until that happens there will be little movement in house purchases."

Whatsthisallabout calls Keynesian house-building schemes "a bit of a myth," and adds, "There are thousands of houses for sale where I live in Northamptonshire, housebuilders are having to offer ever more generous incentive packages to shift the properties they've built including buying your existing house at full market value – how long can that last before their cash-flow is crippled?"

After Thoughts

Both of these comments show a good deal more savvy than the BCC's proposal and provide us with evidence once again that readers of mainstream media retain their common sense about Keynesian schemes. If writers of articles like this employed a similar skepticism, the state of mainstream journalism would be improved and investor understanding of real economics would be advanced.

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