Keynesian Economics Is Destroying U.S. Growth

The New York Times has published a long front-page article on the lower per barrel price of oil that has occurred during the last few months. Times writer Mr. Binyamin Appelbaum is nonplussed by the fact that he is not seeing an inverse upturn, or even a slight uptick, of our economy’s growth resulting from this lower oil cost. This is a puzzle to pundits who believe in Keynesian economic theory. Since the days of the New Deal, Keynesian economists have taken it as an axiom that more money in the hands of consumers means more demand, which in turn leads to an increase of production, and a surging bull economy. This theory has been the bulwark of socialist economics for over one hundred years. It is used to justify endless entitlement programs where the government borrows, prints money, and taxes people to plow into various programs which will enable people to increase their purchasing power. This “injection” into the macroeconomic wallets of the citizens is presumed to be the shot-in-the-arm needed to restore an ailing economy (this includes all those shovel-ready jobs of the stimulus package of 2009, called the American Recovery and Reinvestment Act of 2009). A continuous flow of such injections should mean continuous health of the economic body.

By the same logic, lower prices for any reason also act to stimulate demand. The premise is that any economic event that increases demand will increase production. For Karl Marx, it was the worker who added value to products and whose “need” actually was subsidizing those filthy rich, bourgeois capitalists. However, for the Keynesian, it also was not the capitalist – either investor or manager – who drove the economy, but the consumer. Thus, Keynes again took the spotlight off of capitalists as the drivers of the economy, and placed the locus of “true development” elsewhere. 

But at the same time, in the area of foodstuffs and commodities like corn, wheat, pigs, etc. it was determined in the 1930s that lower prices for the consumers were not good because if the prices were too low, the food producers would be driven out of business. Too many farmers were hungry, broke, and even bankrupt. So the idea of food subsidies was born, whereby farmers were paid to limit production so food prices would be artificially higher. In this way, technically, the government is not fixing food prices as in a communist society, but is manipulating market conditions in order that prices might “adjust” within certain preordained acceptable limits.

Additionally, even before the New Deal, railroad freight rates were controlled. At first there was regulation to prevent collusion between railroads and certain shippers who received more favorable rates than others. This was a good example of government regulation to assure the ethical conduct of business since corporate favoritism obviously implied bribery, not the market, as the underlying malfeasance. However, agricultural political pressure portraying itself as “populism” eventually led to the fixing of freight rates by the government (clearly under the political guidance of agricultural politicians). This had the effect of fixing the price of a key element in agricultural overhead costs, and thus bringing more predictability into their income stream.

This drive to provide avenues for increased market demand and also to assure greater market stability have been the twin engines of much of Federal economic policy and intervention for almost 100 years. The Adam Smith idea of free markets expressed in his classic work The Wealth of Nations has been perceived as being in need of significant adjustments, although it has not been completely rejected. Cycles of prosperity and recession or depression led to the creation of institutions – in particular, the Federal Reserve System – which would offset the extreme highs and lows of the Smith “free market” marketplace. Ironically, the Great Depression that began in 1929 came after the Fed was created, and the Fed stood by as a helpless giant while the economy collapsed.

Similarly, taking the U.S. off the gold standard in 1933 was considered a pro-growth step. Tying the amount of money in circulation to this time-honored commodity, was seen by the Keynesians advising Franklin D. Roosevelt as an undue restriction on the amount of money that could be printed and distributed. They believed that an increase in the money supply was needed to feed and fuel consumption in order to jump start the economy as the Keynesian model required. The Supreme Court found this dramatic step to be lawful under the Constitutional powers of the U.S. Treasury. One implication/side effect of this action was to ratify Keynesian economics as being good for the USA.

As we moved towards the end of the 20th century, the Keynesian twin goals of stability and driving up demand extended itself to global markets. The General Agreement on Trade and Tariffs (GATT) in particular was a way for the left-wing Keynesians to drive up demand for worldwide goods by adjusting U.S. import tariffs downward for goods made outside the U.S., thus redistributing dollars and wealth worldwide to weaker economies. The Keynesian theory here would be that as the wealth of poorer countries increased, the demand worldwide for more advanced U.S. goods and services would be increased. Thus, just as demand would supposedly drive recovery in the USA at times of depression or recession, and keep us from going too far down when there is a slump in the business cycle, the worldwide redistribution of trade flows would lift the world economy. GATT would lessen global slumps, and ultimately redound to the benefit of the U.S. economy. The U.S. has yet to see the benefits of this presumed worldwide upturn. Our international trade balance is still negative.

These Keynesian principles were buttressed by a renewed acceptance of David Ricardo’s principle of comparative advantage first enunciated in the 19th century as a principle for international trade.  In one of his classic books, On The Principles of Political Economy and Taxation, published in 1821, Ricardo wrote, “To produce the wine in Portugal, might require only the labour of 80 men for one year, and to produce the cloth in the same country, might require the labour of 90 men for the same time. It would therefore be advantageous for her to export wine in exchange for cloth [and have their cloth producers working instead to produce wine].” But while the free trade principles expressed by Ricardo, endorsed by the leading economics professors and pundits, has led to an increase in worldwide wealth since 1970, U.S. News and World Report indicated that the USA lost 3.2 million jobs to China alone since 2001. The outsourcing of American jobs has been a grave problem that has been talked about, but not properly addressed, for over forty years.

Now we are in a position to answer the question the New York Times failed to answer in its article about lower oil prices not growing our economy. First, increase in consumer or business demand based on fuel cost savings can go to purchasing products manufactured worldwide, and not only in the U.S. Thus, to the extent there is consumer stimulation of the economy, it is no longer mainly stimulation to the U.S. economy. Second, America has become a service economy. Thus, if for example the healthcare industry is growing in the U.S., people are not getting sicker at a greater rate if oil prices decline. If advertising is booming with hundreds of cable TV stations and thousands of internet popups, those services are not increasing because of money saved. Third, areas that really drive an economy will not be affected by gains enjoyed from lower gas or heating oil costs. What are airlines doing with the extra moneys they are saving through lower costs? What are electric power companies doing with the savings accruing to them? Are they hiring more people? Are they buying more airplanes? Are they lowering prices? No. They are giving themselves bigger bonuses and investing the money to make more money.  Money creating money-without-production is inherently a bubble, and all bubbles must burst.

The Keynesian model is deeply flawed. Rate setting ruined the railroads as a profit-making industry.  Keynesian economics did not stop the Great Depression, nor did it take us out of that depression. Lower fuel prices are a blessing to the consumer, but can never be the stimulus the Keynesians expect them to be. Consumption does not drive the economy. Individualism and opportunity capitalism drive a growing economy. Deregulation drives a growing economy. Low taxes drive a growing economy. Cheap labor drives a growing economy. Those are the conditions that helped us to become an economic superpower at the end of the 19th century, and they are still the basis for economic growth.

The New York Times has published a long front-page article on the lower per barrel price of oil that has occurred during the last few months. Times writer Mr. Binyamin Appelbaum is nonplussed by the fact that he is not seeing an inverse upturn, or even a slight uptick, of our economy’s growth resulting from this lower oil cost. This is a puzzle to pundits who believe in Keynesian economic theory. Since the days of the New Deal, Keynesian economists have taken it as an axiom that more money in the hands of consumers means more demand, which in turn leads to an increase of production, and a surging bull economy. This theory has been the bulwark of socialist economics for over one hundred years. It is used to justify endless entitlement programs where the government borrows, prints money, and taxes people to plow into various programs which will enable people to increase their purchasing power. This “injection” into the macroeconomic wallets of the citizens is presumed to be the shot-in-the-arm needed to restore an ailing economy (this includes all those shovel-ready jobs of the stimulus package of 2009, called the American Recovery and Reinvestment Act of 2009). A continuous flow of such injections should mean continuous health of the economic body.

By the same logic, lower prices for any reason also act to stimulate demand. The premise is that any economic event that increases demand will increase production. For Karl Marx, it was the worker who added value to products and whose “need” actually was subsidizing those filthy rich, bourgeois capitalists. However, for the Keynesian, it also was not the capitalist – either investor or manager – who drove the economy, but the consumer. Thus, Keynes again took the spotlight off of capitalists as the drivers of the economy, and placed the locus of “true development” elsewhere. 

But at the same time, in the area of foodstuffs and commodities like corn, wheat, pigs, etc. it was determined in the 1930s that lower prices for the consumers were not good because if the prices were too low, the food producers would be driven out of business. Too many farmers were hungry, broke, and even bankrupt. So the idea of food subsidies was born, whereby farmers were paid to limit production so food prices would be artificially higher. In this way, technically, the government is not fixing food prices as in a communist society, but is manipulating market conditions in order that prices might “adjust” within certain preordained acceptable limits.

Additionally, even before the New Deal, railroad freight rates were controlled. At first there was regulation to prevent collusion between railroads and certain shippers who received more favorable rates than others. This was a good example of government regulation to assure the ethical conduct of business since corporate favoritism obviously implied bribery, not the market, as the underlying malfeasance. However, agricultural political pressure portraying itself as “populism” eventually led to the fixing of freight rates by the government (clearly under the political guidance of agricultural politicians). This had the effect of fixing the price of a key element in agricultural overhead costs, and thus bringing more predictability into their income stream.

This drive to provide avenues for increased market demand and also to assure greater market stability have been the twin engines of much of Federal economic policy and intervention for almost 100 years. The Adam Smith idea of free markets expressed in his classic work The Wealth of Nations has been perceived as being in need of significant adjustments, although it has not been completely rejected. Cycles of prosperity and recession or depression led to the creation of institutions – in particular, the Federal Reserve System – which would offset the extreme highs and lows of the Smith “free market” marketplace. Ironically, the Great Depression that began in 1929 came after the Fed was created, and the Fed stood by as a helpless giant while the economy collapsed.

Similarly, taking the U.S. off the gold standard in 1933 was considered a pro-growth step. Tying the amount of money in circulation to this time-honored commodity, was seen by the Keynesians advising Franklin D. Roosevelt as an undue restriction on the amount of money that could be printed and distributed. They believed that an increase in the money supply was needed to feed and fuel consumption in order to jump start the economy as the Keynesian model required. The Supreme Court found this dramatic step to be lawful under the Constitutional powers of the U.S. Treasury. One implication/side effect of this action was to ratify Keynesian economics as being good for the USA.

As we moved towards the end of the 20th century, the Keynesian twin goals of stability and driving up demand extended itself to global markets. The General Agreement on Trade and Tariffs (GATT) in particular was a way for the left-wing Keynesians to drive up demand for worldwide goods by adjusting U.S. import tariffs downward for goods made outside the U.S., thus redistributing dollars and wealth worldwide to weaker economies. The Keynesian theory here would be that as the wealth of poorer countries increased, the demand worldwide for more advanced U.S. goods and services would be increased. Thus, just as demand would supposedly drive recovery in the USA at times of depression or recession, and keep us from going too far down when there is a slump in the business cycle, the worldwide redistribution of trade flows would lift the world economy. GATT would lessen global slumps, and ultimately redound to the benefit of the U.S. economy. The U.S. has yet to see the benefits of this presumed worldwide upturn. Our international trade balance is still negative.

These Keynesian principles were buttressed by a renewed acceptance of David Ricardo’s principle of comparative advantage first enunciated in the 19th century as a principle for international trade.  In one of his classic books, On The Principles of Political Economy and Taxation, published in 1821, Ricardo wrote, “To produce the wine in Portugal, might require only the labour of 80 men for one year, and to produce the cloth in the same country, might require the labour of 90 men for the same time. It would therefore be advantageous for her to export wine in exchange for cloth [and have their cloth producers working instead to produce wine].” But while the free trade principles expressed by Ricardo, endorsed by the leading economics professors and pundits, has led to an increase in worldwide wealth since 1970, U.S. News and World Report indicated that the USA lost 3.2 million jobs to China alone since 2001. The outsourcing of American jobs has been a grave problem that has been talked about, but not properly addressed, for over forty years.

Now we are in a position to answer the question the New York Times failed to answer in its article about lower oil prices not growing our economy. First, increase in consumer or business demand based on fuel cost savings can go to purchasing products manufactured worldwide, and not only in the U.S. Thus, to the extent there is consumer stimulation of the economy, it is no longer mainly stimulation to the U.S. economy. Second, America has become a service economy. Thus, if for example the healthcare industry is growing in the U.S., people are not getting sicker at a greater rate if oil prices decline. If advertising is booming with hundreds of cable TV stations and thousands of internet popups, those services are not increasing because of money saved. Third, areas that really drive an economy will not be affected by gains enjoyed from lower gas or heating oil costs. What are airlines doing with the extra moneys they are saving through lower costs? What are electric power companies doing with the savings accruing to them? Are they hiring more people? Are they buying more airplanes? Are they lowering prices? No. They are giving themselves bigger bonuses and investing the money to make more money.  Money creating money-without-production is inherently a bubble, and all bubbles must burst.

The Keynesian model is deeply flawed. Rate setting ruined the railroads as a profit-making industry.  Keynesian economics did not stop the Great Depression, nor did it take us out of that depression. Lower fuel prices are a blessing to the consumer, but can never be the stimulus the Keynesians expect them to be. Consumption does not drive the economy. Individualism and opportunity capitalism drive a growing economy. Deregulation drives a growing economy. Low taxes drive a growing economy. Cheap labor drives a growing economy. Those are the conditions that helped us to become an economic superpower at the end of the 19th century, and they are still the basis for economic growth.