"While many voters in 2008 thought they were electing a progressive, forward-looking President, Obama has turned out to be the most regressive, backward looking President in American history, taking us back to the failed, discredited Keynesianism of the 1930s to 1970s, as if nothing at all interesting happened from 1980 to 2007."(Photo credit: Wikipedia)
Keynesian economics is the false vision of human action which says the way to promote economic recovery and renewed growth is through increased government spending, deficits and debt. If that sounds nuts, that’s because it is.
The idea is that the increased government spending and deficits will increase demand in the economy for more production, and that producers will increase supply to meet that demand, hiring more workers and reducing unemployment in the process. Keynesian economics arose in the 1930s in response to the Depression. It never worked then, as the recession of 1929 extended into the decade long Great Depression. And it never worked anywhere it’s been tried since then, in the U.S. or abroad.
By the 1970s, Keynesian policies had produced double digit unemployment, double digit inflation, and double digit interest rates, all at the same time, along with four successive worsening recessions from 1969 to 1982. Keynesian monetary policy involves running up the money supply to increase demand, with artificially lowered interest rates promoting more spending. That is where the inflation came from.
Ronald Reagan explicitly scrapped Keynesian economics for the more modern supply side economics, which holds that economic growth results from incentives meant to boost production. That results from reduced tax rates, which enable producers to keep a higher proportion of what they produce. It results from reduced regulatory costs, which also increases the net reward for increased production. And it results from monetary policies maintaining a strong, stable dollar, without inflation, which assures investors that the value of their investments will not be depreciated by inflation or a falling dollar, or threatened by repeated recessions resulting from policy induced boom/bust cycles, as in the 1970s.
The results of these Reagan supply side policies have been recounted in several prior columns, and in thorough detail in my 2011 book America’s Ticking Bankruptcy Bomb. Inflation was quickly whipped, cut in half by 1982, and in half again by 1983, never to be heard from again until recently. At the same time (which the Washington establishment said was impossible simultaneously), the economy took off on a 25-year economic boom from 1982 to 2007, interrupted by just two, short, shallow recessions, widely recognized in the economic literature, and by the National Bureau of Economic Research, as one long boom. During the first 7 years of that boom alone, the economy grew by almost one-third, the equivalent of adding the entire economy of West Germany, the third largest in the world at the time, to the U.S. economy.
Supply side godfather Art Laffer and Wall Street Journal Chief Financial Writer Steve Moore summarize in their 2008 book, The End of Prosperity,
“We call this period, 1982-2007, the twenty-five year boom – the greatest period of wealth creation in the history of the planet. In 1980, the net worth – assets minus liabilities – of all U.S.households and business…was $25 trillion in today’s dollars. By 2007, …net worth was just shy of $57 trillion. Adjusting for inflation, more wealth was created in America in the twenty-five year boom than in the previous two hundred years.”
Economist Henry Nau added in the Wall Street Journal on January 26, “the U.S. grew by more than 3% per year [in real terms] from 1980 to 2007, and created more than 50 million new jobs, massively expanding a middle class of working women, African-Americans and legal as well as illegal immigrants. Per capita income increased by 65%, and household income went up substantially in all income categories.”
Similarly, Steve Forbes wrote in Forbes magazine in 2008,
“Between the early 1980s and 2007 we lived in an economic Golden Age. Never before have so many people advanced so far economically in so short a period of time as they have during the last 25 years. Until the credit crisis, 70 million people a year [worldwide] were joining the middle class. The U.S. kicked off this long boom with the economic reforms of Ronald Reagan, particularly his enormous income tax cuts. We burst from the economic stagnation of the 1970s into a dynamic, innovative, high tech-oriented economy. Even in recent years the much maligned U.S. did well. Between year-end 2002 and year-end 2007 U.S. growth exceeded the entire size of China’s economy.”
In other words, the growth in the U.S. economy from 2002 to 2007 was the equivalent of adding the entire economy of China to the U.S. economy.
But Obama, who playacts like he was asleep during this whole time, like Rip Van Winkle, tells us it didn’t work. While many voters in 2008 thought they were electing a progressive, forward-looking President, Obama has turned out to be the most regressive, backward looking President in American history, taking us back to the failed, discredited Keynesianism of the 1930s to 1970s, as if nothing at all interesting happened from 1980 to 2007.
Apparently determined to prove once more that Keynesian economics doesn’t work, Obama’s first major act in office was to pursue the unreconstructed Keynesianism of the nearly $1 trillion so-called “stimulus,” which we now know didn’t stimulate anything except government spending, deficits and debt. Obama promised us at the time that if his “stimulus” bill passed, the unemployment rate would never exceed 8%, and would decline to 5.8% by May of this year. But in reality it was 8.2% and rising in May.
Last Friday’s jobs report for June indicated that the most commonly cited U3 unemployment rate remains stuck at 8.2%. That makes 41 straight months of unemployment over 8%, which the Joint Economic Committee of Congress confirms is the worst recovery from a recession since the Great Depression almost 75 years ago. Indeed, the last time before Obama that unemployment was even over 8% was December, 1983, when Reaganomics was bringing it down from the Keynesian fiasco of the 1970s. It didn’t climb back above that level for 25 years, a generation, which is another measure of the spectacular success of Reaganomics.
Comments
Keynesian economics is just an excuse governments and politicans use to take money and give it to their buddies and special interests, and end it with sticking the people with the deficit.
Some independent think-tanks have tried to track down where the “stimulus money” went in their states and they can’t figure it out. The money just disapperead…..into the pockets of labor unions, Solyndra-type companies and little buddies of corrupt politicians everywhere in the country.
I majored in Economics at college in the late 70′s, and Keynesian economics was already being weaned out of what was taught (but not completely). I agree with the author–what didn’t work back then, still won’t work today. Supply-side economics goes far beyond the scope of Keynesian theories because it considers a more complete picture. But (I’ve also learned), on rare occasions, the off-the-wall, unthinkable, and supposedly unworkable and implausible theory is just exactly what explains why whatever happened economically, happen.
I majored in Economics at college in the late 70′s, and Keynesian economics was already being weaned out of what was taught (but not completely). I agree with the author–what didn’t work back then, still won’t work today. Supply-side economics goes far beyond the scope of Keynesian theories because it considers a more complete picture. But (I’ve also learned), on rare occasions, the off-the-wall, unthinkable, and supposedly unworkable and implausible theory is just exactly what explains why, whatever happened economically, happen.
Thanks Mr. Ferrara,
Here is a little explanation of why government generally fails to produce much of value in its stimulus efforts.
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The Keynesian prescription has always been to engineer an increase in aggregate demand for an ailing economy. The flaw in this reasoning is not found in aggregate demand, which can be easily manipulated by the dearth or superfluity of money. The flaw is found in aggregate supply.
In economic hardship, the Keynesians inevitably select their preferred remedial lever: augmented government expenditure to utilize idle resources. Suppose the government requires $1 billion for some public venture: a job creation project consisting of workers digging holes in the morning and filling them in during the afternoon: an undertaking of overtly little worth. The government borrows $1 billion on the markets for the diggers’ project. There is an effect upon interest rates, but it is negligible given the size of the economy. The borrowing rate is 6%.
At the end of the project, idle people were paid to produce nothing for the $1 billion received. They did not build any houses. They did not build cars. They did not enforce the law. They did not create any salable or valued product. If none had bothered to show up while still receiving pay, the result would have been the same.
The flaw in Keynesian reasoning is located within the factor of production. When the nation workers earn $1 billion, value was given for the income received. The worthy employees gave the economy $1.0 billion worth of production. They built, designed, engineered, insured, piloted, manufactured, performing a variety of economically worthy pursuits and supplying goods that the markets demanded. The earners produced valued goods and services and were rewarded for their efforts. With the earnings, they retired debt, consumed, invested, saved.
The Dig and its assorted workers certainly consumed materials, equipment, and domestic goods. But the good offered by the project no one needs, no one values. The entire project yielded nothing of value, nothing for consumption or service. The effort’s value comes to naught.
The productive workers have supplied a certain amount of salable goods. The unproductive workers have supplied no salable goods. But both have the means of competing for a static supply of goods. With 90% of the nation employed in worthy pursuits and the idle remainder hired for the worthless Dig, 100% of the nation’s workers will compete in markets for only 90% of the goods, the other 10% being valueless. Too much money chasing to few goods, or by another name – Inflation.
If the numbers of idle workers climb because of the severity of the recession, the situation aggravates accordingly: diminished salable goods available among consuming competitors. The problem in the Keynesian prescription is not a shortage of aggregate demand, but surprisingly a shortage of aggregate supply.
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Regards,
Gary Marshall
Way to rewrite history. In real life, facing high inflation at the beginning of the 1980s, the Fed dramatically tightened up and raised interest rates to unheard of levels.
The Reagan administration came into office with a specific program of cutting income tax rates to upper income earners, without any particular rationale. It happened that the Fed tightening produced a recession that dominated Reagan’s first term.
The administration conducted a Keynesian policy of dramatically increasing government spending while cutting taxes, leading to massive govt borrowing and massively increasing the natonal debt.
When the recession ended, the Reagan administration tried to reduce the deficit with a series of non-income tax increases.
In what universe is that not Keynesian policy ?
Reagan’s acolytes had an elaborate supply side rationale but the real policy was Keynesian fiscal policy, whether they understood that or not.
How seriously did the upper echelon of Reagan’s administration take supply side policy? Reagan’s Budget Director, David Stockman, told a 1981 interiewer: “It’s kind of hard to sell ‘trickle down,’ … Supply-side is ‘trickle-down’ theory.” Later in the article Stockman seemed to imply that supply-side economics was a “crackpot theory.” He said of Kemp-Roth, the original Reagan tax cut bill: “Kemp-Roth was always a Trojan horse to bring down the top rate.”
Historically, Keynesian policy has always worked in a demand side recession. What we faced in the 1974 and Reagan era recessions was stagflation…cost push inflation produced by supply shocks coupled with economic stagnation that drifted into recession as the Fed tried to fight the inflation.
Stagflation is a much tougher policy problem and Keynesian demand side policy can’t be deployed because of the inflationary element.
Our current difficulty, however, is a demand side economic slowdown. If any fiscal policy will be effective, it will have to be Keynesian fiscal stimulus.
The “conservatives” are selling austerity today for the very reason that it will make the situation worse and thereby undercut the Obama administration.
Hello Dallass,
So in a high inflation economy, the Fed raised interest rates?
I would think lenders seeing so reason to lend money at 5% when inflation rates were 10% raised lending rates, don’t you?
Let’s put our thinking caps on now.
That’s right. Reagan fought the recession with Tax cuts, and look at the difference in results. Look at the disaster that Obama has wrought with massive spending increases and little in the way of tax cuts.
Well, it looks like David Stockman was wrong.
So let’s try tax cuts, the only option not considered by Obama with his 4 years of dismal economic failure. Let’s see what happens.
But Dallass doesn’t think it will work? And who is Dallass that he makes such predictions?
GM
Reagan was a Keynesian. The Reagan economy recovered driven by three primary forces, increased Gov. spending for armament spending(Keynesian), reduced taxes (sorry, also Keynesian see the General Theory) and lower oil prices. All of these forces cause more currency to circulate within the domestic economy. There is mechanically no difference between gov. spending and a tax cut. Gov. spending spends money into the economy and a tax cut stops money from being removed from the economy. It’s two sides of the same coin. The result is the same – more money circulating in the economy.
dac59 – There is functionally no difference between a tax cut and a spending increase, but there is considerable evidence that most tax cuts have a multiplier of less than one while spending multipliers are generally greater than one (Robert Barro to the contrary.) So, although both are Keynesian stumuli, a spending increase is probably more effective.
dallasdunlap – Your right. Among other things spending cuts can be targeted to remain inside the domestic economy while tax cuts cannot. There is more multiplier effect from building Hoover Dam, then from tax cuts that are used to buy an equal dollar amount of Chinese made TV’s.
Hello Dac,
Assuming that all tax cuts go to consumption and that they all go to buying Chinese imports which constitute such a small portion of US GNP.
GM
Hello Dallass,
So a big increase in government expenditure will cure what ails the economy. And what has been the result so far, just so we know what success to expect?
What a goof!
GM
Mr. Ferrara,
You wrote:”Keynesian economics is the false vision of human action which says the way to promote economic recovery and renewed growth is through increased government spending, deficits and debt.”
You do not understand what Dr. Keynes wrote. His arguments for deficit spending are not for all times and places but rather are confined to periods of economic decline, such as the Great Depression of his time or the Great Recession of our time. During these times, capital is not being invested by capitalists.
Dr. Keynes did not suggest that in times of economic expansion government should “priming the pump”, only in periods of economic contraction when it does not expand on its own. Keynesian economics are the equivalent to the Heimlich Maneuver, it is used in when the patient cannot breath, not other times.
Hey David,
Why not tell that to most every economist in the US and everyone in Europe. They are under the mistaken impression that the more government expenditure there is, the wealthier the every nation shall be. And how they have practiced what they preach. Greece having gone the furthest can’t find lenders. And Italy, Portugal and so many other European big government economies are not far behind.
But the multiplier is correct. It will increase the wealth of all nations. Just look at Europe and the US.
GM