Keynesian economics was born in the 1930s, the brainchild of British economist John Maynard Keynes. It argued that the way to stimulate a flagging economy back into growth was to increase government spending and deficits. The extra demand for goods and services from that increased spending would induce increased production to meet the demand, restoring full employment and growth.
The concept was quickly embraced by politicians and lefty academics because it justified exactly what they wanted. For the liberal/left politicians dominant in Washington at the time, it gave them cover for the record government spending they wanted to buy votes, without having to raise taxes fully to pay for it. For the lefty academics, it gave them cover for their wish list of runaway government spending policies.
There was just one problem. It never worked to revive economic growth and end the Depression. Rather, as demonstrated by Amity Shlaes in her landmark book The Forgotten Man, it was one component of a slew of Big Government policies that put the "Great" into the "Great Depression," keeping unemployment absurdly high and preventing any natural, cyclical recovery for more than a decade.
The fallacies of Keynesian economics were exposed decades ago by Friedrich Hayek and Milton Friedman. Keynesian thinking was then fully discredited in the 1970s, when the Keynesians could offer no explanation and no cure for the double digit inflation, interest rates, and unemployment, and the persistent stagnation, that resulted from their policies. President Reagan formally dumped Keynesianism in favor of free-market and supply-side policies that produced a 25-year global economic boom.
Yet, President Obama showed up in early 2009 with the dismissive certitude that none of this history ever happened, and national economic policy was decidedly back in the 1930s.
The New Failure of Keynesian Economics According to the National Bureau of Economic Research, the current recession started in December 2007. From the beginning, we approached this recession with old-fashioned Keynesian economics, rather than the more modern, incentives-oriented, supply-side economics that has swept the world. In February, 2008, then President Bush cut a deal with Congressional Democrat majorities to pass a $152 billion stimulus bill entirely based on the Keynesian rationale of countering the recession with increased spending and deficits. The centerpiece was a tax rebate of up to $600 per person, which had no significant effect on economic incentives, as reductions in tax rates do.
This Keynesian stimulus produced no significant blip in the raging economic downturn, richly earning its well deserved fate of having been completely forgotten. Bush Treasury Secretary Henry Paulsen, the economic guru of the Administration at the time, himself was intellectually stuck in the deep historical recesses of Keynesianism, failing to promote Reagan's free market and supply side policies to counter the downturn. Indeed, Reagan's 25-year global boom ended as the Bush Administration abandoned every component of Reaganomics one by one, culminating in Paulson's throwback Keynesian stimulus in early 2008.
Yet, contrary to his campaign theme of change, President Obama simply quintupled down on Bush's 2008 Keynesianism. Obama learned nothing from the Bush/Paulsen/Pelosi/Reid early 2008 Keynesian failure, which Senator Obama vigorously supported at the time. President Obama came back in February, 2009 to support a new, $787 billion, purely Keynesian stimulus bill.
Even the tax cut portion of that bill, which President Obama is still wildly touting to the public, was purely Keynesian. The centerpiece was a $400 per worker tax credit, which, again, has no significant effect on economic incentives. While President Obama is proclaiming that this delivered on his campaign promise to cut taxes for 95% of Americans, in the Democrat budget that passed Congress this year even this tax credit disappears after next year.
Since World War II, recessions have averaged 10 months, and the longest has been 16 months. Exactly when the current recession can be scored as over is unclear at this point (positive GDP growth may have finally restarted). But it now has been 20 months since the recession began in December 2007, and it will clearly end as the longest by far since World War II. Indeed, from 1887 to 1929, recessions averaged 10 months as well, with the longest during that time also 16 months. For over 120 years at least, recessions have lasted the longest only when countered by intellectually and practically discredited Keynesian economics.
We now hear loud hosannas not for recovery, but for the slowdown in economic decline, with only 250,000 jobs lost last month, and the economy declining by only 1% in the second quarter. Based on his rhetoric, President Obama expects political credit for anyone who still has a job!
This bar for success is way too low. As indicated above, real economic recovery is now overdue by at least 4 months. Rather than promoting recovery, the Keynesian economic policies adopted by both Obama and Bush since the beginning of this recession have more likely delayed it, by borrowing hundreds of billions and ultimately trillions in investment capital out of the private economy, and destroying the jobs that would have resulted from that money in the private economy.
Cycles Naturally Go Up As Well As Down Remember the term business cycle? The sweeping, pro-growth policies adopted by President Reagan were so successful in preventing any major downturn for 25 years that we don't seem to remember what that term means anymore. But it implies that along with periodic downturns the economic cycle will naturally turn up as well. Every morning the American people wake up and throw themselves into restoring the economic viability of their businesses, or finding themselves jobs. This is the primary factor in causing the economy eventually to turn back up.
The Keynesian economic policies adopted by Obama and Bush do nothing to help these businessmen and working people cure the economy. Borrowing close to a trillion dollars from the private economy to increase government spending by close to a trillion dollars does nothing to expand the economy on net. Indeed, it may well result in a net loss of jobs due to government carrying costs and the economic friction resulting from moving all of that money around. Moreover, again this policy does nothing to increase incentives for investment, starting new businesses, expanding businesses, creating new jobs, or entrepreneurship. For these reasons, the best estimate of the number of jobs saved or created by the Obama stimulus is exactly zero.
The result of the willfully blind, throwback, untutored Keynesian economic policies continued and wildly expanded by President Obama is the longest recession since World War II dragging on for around 20 months now, and maybe still more. Almost 7 million jobs have been destroyed during this overextended downturn. Besides the 250,000 additional jobs lost last month, another 422,000 former workers dropped out of the workforce altogether. Almost 800,000 workers are counted as officially discouraged because they can't find work, and so are not even counted as in the work force or in the official unemployment rate. Another 8.8 million who have been reduced to part-time status due to the recession are also not counted in the unemployment rate, and many others have suffered reduced hours as well. Over one third (5 million) of the 14.5 million unemployed have now been without work for at least 27 weeks, or about half a year, with almost 600,000 joining their ranks last month alone.
Letter to the Editor
Peter Ferrara is Director of Entitlement and Budget Policy at the Institute for Policy Innovation, and General Counsel of the American Civil Rights Union. He served in the White House Office of Policy Development under President Reagan, and as Associate Deputy Attorney General of the United States under the first President Bush. He is a graduate of Harvard College and Harvard Law School.
Yes, it is real.
Worldwide same..............................
I took economics in night school long after I had left university (where I failed it). The class was filled with businessmen and the book was Samuelson. Everyone in the classroom argued with the younger prof that the stuff he was teaching us did not work in reality, citing examples from our experience.
His response was to shout at us that the point of the class was for us to read the book and listen to him and pass the test at the end.
There, I have since come to believe, is the mantra of an entire generation, which has set our country on the road to ruin.
For just about every dollar spent by the federal government the overhead is tremendous, taking about 82 cents of every dollar to support bureaucracy overhead. No business could survive with such overhead.
One problem that the current tax structure also propogates is tax havens. We wouldn't be going after UBS if the corporate tax rates in the country were more reasonable, because those people would be keeping their money here in America (or at least more of them).
HOW many billions are kept offshore, outside of American banks? How much less of a problem would we have if we could get that money - with cooperation, not prosecution - back into American banks?
That scratching you hear is Bob revving up his Ferrara-hate machine and copying his GDP and effective tax rate charts desperately to prove that his prediction that all would be rosy once again by the end of 2009 is still true, and that the collapse we are witnessing is a figment of right-wing ideologues' imaginations.
Bob, I hate to remind you, but there are only about 120 days left in 2009. If humpty dumpty is going to be put back together again in that time, shouldn't we start, you know, getting the glue out?
I know, I know: It's not your fault. You were right. It's just that blasted Reality got in the way of your charts and your theories.
Don't you hate it when that happens?
Robert, you are so right about the overhead.
That's why when people like "Liberal Reader" tell us that Medicare is run with a 3% administrative cost vs. about 33% for private insurance companies, my jaw drops to the ground. The truth about "administrative costs" for Medicare - and all government bureaucracy, is, as you say, over 80%!
Since when is supporting bloated bureaucracy with no profit incentive ipso facto MORE efficient than a for-profit business that must obey market forces (when they're not hopelessy distorted by government, of course)?
Answer: In the mind of the liberal. Never let reality impinge on the dream.
It is becoming obvious that anything that was not written by Karl Marx or Saul Alinsky is outside the current occupant of the White House's knowledge base.
FOOLS
NEVER
LEARN
I initially earned a degree in Economics. I soon realized that theory is fine on a campus. I went back to school for Accounting. One problem with the "Stimulus" bill is that the short-term projects have no long term influence on behavior or business. For instance a "shovel-ready" painting or paving program will only last a few weeks. That is not enough time for a worker or business owner to make a long term investment in equipment, housing or autos. It is make work that may accomplish a need, i.e. repair a bridge, but it does not have the effect of a "permanent" tax cut. Keynes theories do not seem to reflect those behavioral issues.
Appleby ... "His response was to shout at us that the point of the class was for us to read the book and listen to him and pass the test at the end.
There, I have since come to believe, is the mantra of an entire generation, which has set our country on the road to ruin. "
I agree, yet it's not generational, it's geographical (as in within the beltway). Why else would our so-called representatives (including those who have been there for decades) be trying to sell us on whatever it is health reform is called these days, instead of listening to the views of those they purport to represent? The whole purpose of these meetings should be to listen to what their constituents want and try to represent that in DC. Instead, they come to tell us what they're planning and try to convince us we should go along with it. When did this complete shift in purpose happen?
11/2010 is a long way off.
JerseyJ, "11/2010 is a long way off."
We don't have to wait that long. Read this thread from yesterday's Spectator. I didn't see your pseudonym in the thread, so you may have not seen it. Lots of debate about what to do and when.
http://spectator.org/archives/.....as-hot-air
Take care friend.
Con Spiracy
JerseyJ, Respectfully, I have to agree with Appleby; it is generational, and apparently multigenerational"”not simply geographical. Our 'institutions of higher learning'"”the supposed 'bastions of free thought and examination'"”are anything but. Seldom are professors teaching how to think, but instead, what to think.
How else to explain the continued denial of facts, history and experience? "What you see ain't really so, because Obama told me so."
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