Keynes: The End of a Bad Idea

The dream of spending our way out of recession got a step closer to death at the Toronto Summit of G8 and G20 leaders. Things just aren't what they were.

Every bad idea seems to have its Wordsworthian moment:
Bliss was it in that dawn to be alive
But to be young was very heaven.
The early enthusiasm for Keynesian economics certainly qualifies. The dawn of Keynes was very heaven, if you were young back then. But now we are at the moment when a new generation asks: What was all the fuss about?

Last weekend's G-20 summit in Toronto issued a veiled rebuke to the Obama administration's continuing appetite for Keynesian stimulus. In an oblique report in the New York Times, Sewell Chan and Jackie Calmes wrote that G-20 leaders called for

a timetable for cutting their deficits and halting the growth of their public debt, despite the Obama administration's concern that reducing spending too quickly might set back the fragile global recovery.

An unveiled editorial the Wall Street Journal exulted over the dead end of Keynesian economics. Finally the Journal can report that the idea of spending our way to prosperity is going out of style. The blissful dawn is ending in humiliation and failure.

What could ever be so exciting and new about giving governments an excuse to spend and print money? When have governments ever needed an excuse to spend and inflate? If you want excitement, go and get all tingly about limited government -- the radical idea of limiting the power of government to spend and inflate.

But, you young 'uns will ask, how did this crazy Keynesian cult take over the minds of our parents and grandparents?

The answer is that it wasn't easy. Even after decades of progressive and socialist propaganda, it took a major government failure in the Great Depression of the 1930s.

In the depths of the Great Depression, capitalism had failed, "everyone" agreed. It was what we would now call a "consensus." 

Had capitalism really failed? Hardly. After World War I, communism and fascism and social legislation were in the saddle, and government was bulking up all over.

When the Great Crash struck in 1929, progressives and socialists had managed to drive a stake through the heart of capitalism, but the heart was still beating.  In the U.S., there was a split between progressive interventionists like President Hoover and sound-money believers in the liquidation of malinvestments. In the middle of it all, the clueless Federal Reserve Board split the difference and failed in its primary job to act as a lender of last resort. It rescued the banks that were too big to fail, but not the banks that failed to be big.

Then along came Keynes and his book, The General Theory of Employment, Interest and Money, and he made inflationism and deficit spending no longer the last resort of a failed royal dynasty, but the first resort of a sophisticated cosmopolitan. No wonder "everyone" thought it was bliss to be alive.

The pièce de resistance of Keynes' theory was the Multiplier. The more money the government spent, the more it multiplied, and the more it would stimulate the economy. When economists actually got around to doing research on the Keynesian Multiplier, they found it didn't work. See Barro and Redlick, "Stimulus Spending Doesn't Work."

Keynesian economics was a failure right out of the gate in the 1930s. That's why the Great Depression lingered on as FDR and his Brain Trust tried one "bold, persistent experimentation" after another. 

It took six years of bold, persistent failure, but the American people finally decided, in the off-year elections of 1938, that they had had enough, so they sent 79 new Republicans to Congress. You can read all about it in Amity Shlaes' The Forgotten Man, and also at

Thirty years later, in the 1960s, liberals tried again and ended up sending a grade-B Hollywood actor to the White House in 1980 in an inflationary recession.

Now it's thirty years later again, and the Keynesians are making one last college try. It's not working any better than it did in the Great Depression or the 1970s. But there's a difference. Back in the early 1930s, the U.S. government debt was a mere 25 percent of GDP. Now, in 2010, it is budgeted at about 95 percent of GDP. It's one thing to throw borrowed money at uneconomic projects when the national debt is down at 25 percent. When the debt is at 95 percent of GDP, the money power starts to murmur about the risk of sovereign default.

As we enter the endgame of Keynesianism, the words of Pope John Paul II in the endgame of a bad idea should inspire us once again. "Be not afraid." Just as the Poles weren't going to get rid of Communism without a struggle, we were never going to get rid of Keynesian economics on the cheap. 

We won't bury Keynesian economics until after Keynesian economics buries the liberals. Fortunately, as Marx might have said, history during the Obama administration is repeating itself as farce.

Christopher Chantrill is a frequent contributor to American Thinker. See his and  His Road to the Middle Class is forthcoming.