The Madness of Keynesian Economics

President Barack Obama demands more stimulus spending to avoid the "fiscal cliff."   Obama increased the national debt $6 trillion to $16 trillion.  Yet the Democrats' 'cure for what ails ya' is even more spending.   Obama demands around $75 billion in new spending to stimulate the economy in 2013. 

"Keynesian Economics" is the insane belief that the economy can be stimulated by government spending.  It provides the excuse to depart from common sense that allows politicians to ignore the alarm bells.  It is ludicrous mainly because our government doesn't have any money to spend. 

If the government had a surplus saved up, spending actual money might give our economy a short-term sugar high (with dubious long-term results).   But our Federal and state governments must first suck money out of the economy by borrowing it.

History has repeatedly proven that this is nonsense.  Yet Democrats will not let go of the Keynesian Myth.  The government is the center of society, America's modern Democrats want to believe.  So they cannot shake the dogma that our entire economy depends upon government spending.

The New Deal was the largest real-world test of the Keynesian Myth in recent history. Franklin Roosevelt's Treasury Secretary Henry Morgenthau confessed that the "New Deal" was a failure in sworn testimony before Congress on May 9, 1939. 

"We have tried spending money. We are spending more than we have ever spent before and it does not work."

And FDR's Treasury Secretary also told Congress:

"I say after eight years of this Administration we have just as much unemployment as when we started. ... And an enormous debt to boot!"  (See:  Human Events and The Heritage Foundation 

What's more, Morgenthau was a friend and ally of FDR's, not just the Treasury Secretary responsible for the finances of the New Deal.

Morgenthau made this "startling confession," says historian Burton W. Folsom Jr., in the New Deal's seventh year.   "In these words, Morgenthau summarized a decade of disaster, especially during the years Roosevelt was in power. Indeed average unemployment for the whole year in 1939 would be higher than that in 1931, the year before Roosevelt captured the presidency from Herbert Hoover," Folsom's book is "New Deal or Raw Deal?: How FDR's Economic Legacy Has Damaged America." 

It's like this:  You scoop water from the deep end of a swimming pool with a bucket, run around to the shallow end, and then pour the water into the shallow end of the pool.  Can you make the shallow end deeper?  The entire swimming pool is one inter-connected whole.  You are accomplishing nothing...  except spilling some water (waste) and using up energy (administrative overhead).

So our government vacuums money out of the economy by borrowing it.  The money is largely wasted because it is directed according to political goals and to benefit political cronies, not by sound economic criteria.  No one is accountable for good or bad results.  Some of the money is wasted on administrative overhead.  Some of the money is wasted on fraud or abuse or to line people's pockets. 

But nothing real has changed.  So the economy will end up right back where it was before -- after a sugar rush hangover.  Salaries might be bigger only due to inflation lowering the value of the dollar.  

For one thing, businesses and consumers do not change their behavior when they know that government actions are only temporary.   Only permanent changes in conditions affect economic dynamics, empirical evidence shows.

Advocates for the Keynesian Myth argue that unemployment dipped during the Great Depression from 20% to "only" 14% in 1938, before it jumped back up to 17% by 1939.  They insist that "austerity" budgets drove unemployment back up again to 17%.

So liberals admit that Keynesian Economics is a failure.  As soon as the government spending stops, the economy slumps back where it was before.  Nothing has actually changed.  The Keynesian Myth promises that the economy can be fundamentally improved. 

Moreover, liberals ignore the massive debt they burden the country with.  Considering the whole picture, including the debt, the nation is left worse off than it was to start with.

Liberals argue that Roosevelt's stimulus was not big enough and it took World War II to finally end the Great Depression.  However, Obama's most out-spoken economist lets the truth slip:   The Great Depression ended partly because Adolf Hitler drove wealth out of Europe and into the United States.  As European war loomed in 1938 and 1939, genuine increases in real investments flowing from Europe fundamentally grew the economy.  This was real money invested in the country, not government manipulation. 

Christina D. Romer is Obama's most eager cheerleader for the Keynesian madness.  But she cannot avoid giving away the store in the process.  Romer was Chair of President Obama's Council of Economic Advisers, and an economics professor at the University of California, Berkeley.

Romer reluctantly lets the cat out of the bag.  It was not World War II deficit spending but the military draft removing nearly 10 million men from the work force.   Nearly 10 million jobs needed to be back-filled.   Romer also reluctantly concedes that economic participation was driven by national survival.  In a recession, consumers pull back on spending out of fear and limited funds, while businesses wait for the economy to improve.  But when Japan bombed Pearl Harbor, and Germany declared war under their defense pact, national output soared out of patriotism.  After the war, many of America's global competitors had been laid waste while the USA was untouched.

Economic historian Robert Higgs offers a detailed analysis in his book Depression, War and Cold War of how Roosevelt's New Deal made the Great Depression longer and worse and how government deficit spending during World War II did not cure the Great Depression.  Higgs notes that Roosevelt stimulated manufacturing with some policies that are today Republican proposals:  Tax deferrals, contractual incentives, and capital and guarantees to convert their factors to defense manufacturing.

Top economists show us that the government cannot expand the economy through deficit spending because borrowing disrupts and displaces other economic activities, including Milton Freedman, E. Cary, John Taylor of Stanford, Gary Becker and Eugene Fama of the University of Chicago and Greg Mankiw and Robert Barro of Harvard. In the end, the government simply moves economic activity around (benefitting campaign donors) without any real improvement. As economist Hal Varian of the University of California at Berkeley points out, private investment  in the economy builds a foundation for long-term, sustainable growth and prosperity, whereas government spending does not.

When political cronies benefit, honest business building is demoralized and discouraged.  Economic growth is harmed by liberal meddling and government disruption of the private sector.

This author was reminded (scolded, really) that even John Maynard Keynes himself would never approve of the claptrap thrown around in his name.   Keynes argued that governments should run deficits in bad times but should also pay off those debts promptly in good times and run up surpluses to save for the future.  But since Keynes is not here anymore to defend his reputation, Keynes' theories have become grossly perverted in the halls of Congress, the White House, and academia.]

Now, the tea party cannot save the country without slaying the Keynesian dragon once and for all.  The tea party is fighting against out-of-control government spending as its most important priority.  Ordinary Americans were driven out of their living rooms and into the streets to form the tea party by the fiscal madness in Washington.  But the tea party cannot bring a stop to deficit spending without confronting the demon at its core.

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