Economists Are Not Historians
It's past time for some economic myth-busting: the American government is not "starved" for revenues, but it should be. The Internal Revenue Service and the U.S. Treasury collect more taxes annually than any nation in history, but, in each of the three-plus years of the Obama administration, the government has spent well in excess of a trillion dollars more than Treasury receipts. The president and the American left tell us that America must spend more.
In the 1930s, when economist John Maynard Keynes wrote The General Theory of Employment, Interest and Money, the governments of most prosperous nations -- and their debts -- were small, certainly when compared to today's government behemoths. At that time, "increasing aggregate demand" using deficit spending was, at best, a plausible response to economic downturns. Today, gigantic, unwieldy governments in Europe and at home -- and their economies -- are overwhelmed by massive debt. The standard Keynesian answer to economic downturns -- increased spending and the expansion of debt -- assumes the willingness of bond markets to finance the increased debt at manageable interest rates. If the markets do not respond, Keynesian policies fail. In fact, because they inevitably involve government interference in markets, Keynesian policies have always failed.
Since the current recession began, despite a huge Keynesian stimulus, unemployment remains extremely high and recovery disappointing.
Dr. Robert Barro, professor of economics at Harvard and a senior fellow at Stanford's Hoover Institution, has concluded that "fiscal deficits have only a short-run expansionary impact on growth and then become negative[.] ... [T]he results from following this policy advice are persistently low economic growth and an exploding ratio of public debt to Gross Domestic Product (GDP)."
History proves two things: 1) that austerity works and 2) that Keynesian economists are not historians.
Since the turn of the last century, there are numerous periods in American and world history during which reductions in government spending refuted the Keynesian model.
You will never hear a Keynesian economist mention the depression of 1920-1921, or accurately explain what brought America out of it. The facts don't fit the Keynesian narrative. President Warren Harding cut the federal budget 48% from 1920 to 1922. The economy boomed. President Calvin Coolidge continued Harding's fiscal prudence, spending less in 1928 than Harding did in 1922. America enjoyed nine years of budget surpluses and arguably the best national economy in the world, post-World War I.
As World War II wound down, the United States cut spending by 75 percent. Spending as a percentage of GDP plunged from 44 percent in 1944 to 9 percent in 1948. Horrified, Keynesian Paul Samuelson, later a Nobel Prize-winner in economics, predicted "the greatest period of unemployment and industrial dislocation which any economy has ever faced." Other Keynesians foresaw violence in American streets. Instead, Samuelson advocated a gradual spending drawdown. Washington ignored him.
The post-war U.S. economy thrived. There was no mass unemployment despite rapid demobilization of the armed forces. It's true that the numbers of unemployed increased, but with a civilian labor force of 60.1 million, the 2.3 million unemployed people calculated an unemployment rate of only 3.8 percent, far superior to today's 8.1 percent. President Harry Truman said, "This is probably close to the minimum unavoidable in a free economy of great mobility such as ours."
Keynesians dismissed the postwar boom as an outlier. But the economy boomed again after the Cold War ended and overall federal spending fell from 22 percent of GDP in 1991 to 18 percent in 2000. During the period, real GDP grew by 40 percent with an average annual growth rate of 3.8 percent.
Recently, on Europe, Dr. Barro wrote, "Two interesting ... cases are Germany and Sweden, each of which moved toward rough budget balance between 2009 and 2011 while sustaining comparatively strong growth -- the average growth rate per year of real GDP for 2010 and 2011 was 3.6% for Germany and 4.9% for Sweden. If austerity is so terrible, how come these two countries have done so well?" And: "... there is nothing in the overall [European] Organization for Economic Cooperation and Development (OECD) data since 2009 that supports the Keynesian view that fiscal expansion has promoted economic growth."
Barro concludes: "[T]here is a lot to say on economic grounds for strengthening fiscal austerity in OECD countries." That applies to America as well.
In fact, America and the European countries all suffer from decades of over-promising, overspending, and over-indulging special interests. To survive, America must give austerity another chance.
J. Shenk e-mail: email@example.com