Economics: The Keynesian Failure

Member Group : Jerry Shenk

Historical studies are enlivened by court intrigues, gossip and warfare. Language studies, including English, introduce students to rich literary traditions. The study of science or engineering offers the potential for practical discoveries. Even political science and sociology, "sciences" in the tradition of astrology, entertain students with fascinating trivialities.

Arguably, the dullest of academic pursuits is economics. Nonetheless, one hopes that readers’ attention can be held long enough to learn of the disservices done to John Maynard Keynes – and to America – by Keynes’ most ardent followers in the fields of economics and politics.

Keynes (1883-1946) was a Cambridge-educated mathematician/statistician, a British economist and macroeconomic theorist who, in the 1930s, revised classical theories of economics. His book, "General Theory of Employment, Interest and Money," attempted, among other things, to explain the Great Depression, to propose strategies to end it and to avoid future catastrophic economic events.

Keynes rejected the classical theory of supply and demand, writing that aggregate demand, instead, determines economic output. He advocated government intervention in markets and deficit spending to smooth out economic cycles. Keynes named such intervention "priming the pump."

Economics is not an exact science, but, thanks to Keynes’ acolytes, some of its rules have become clear. One is that, though deficit spending may briefly and superficially improve GDP, government cannot spend a nation to prosperity. Nor can prosperity be achieved through taxation. Keynesians have proven these rules by repeatedly violating both – and failing.

For example, the Congressional Budget Office now estimates that the president’s already-ineffective $835 billion Keynesian "stimulus" will also reduce economic output in the long run, primarily from its contribution to government debt which diverts private capital from more productive activities.

Politicians happily use spending public funds to purchase votes, favorable publicity and campaign contributions. Employing Keynes’s "pump priming" theory as justification – and enabled by the ignorance, indifference and greed of enough voters – many politicians enthusiastically embrace deficit spending, and not just during recessions.

Spending is popular (and who is more obsessed with popularity than politicians?), but modern Keynesians ignore or are ignorant of a complementary feature of Keynes’ deficit spending advocacy – his admonition to raise taxes during economic upswings in order to offset earlier deficits and pay down the accumulated debt. However, because of their political unpopularity, tax increases are seldom levied in prosperous times, so debt mounts along with the costs of servicing it, while spending continues.

Even in times of economic health, spendthrift politicians advocate deficit spending and market intrusions, but without Keynes’ corollary – to pay down debt in prosperous times. Indeed, politicians have perverted Keynesian theory to justify tax increases at exactly the wrong time – during recessions and flat economies – thinking they can generate more tax receipts to support ever more Keynesian-style spending even when the private sector can least spare the assets. The 2009 stimulus illustrates how Keynesian spending turns negative.
So, to "prove" the Keynesian hypothetical, spending must be repeated over and over, while Keynes’ admonition to retire debt is ignored.

Politicians advocate simultaneous deficit spending and tax policies with the blessings of liberal Keynesian economists who appear to have lost sight of the full inventory of features in Keynes’ theories or who are ideologically inclined to overlook them. To underpin their enthusiasm for large government, liberal economists distort Keynesianism, but their thinking, like Keynes’, lacks measured, positive, sustained empirical results.

Keynesians’ "theorizing" is not empiricism, but this is: In a 2009 book, "This Time It’s Different: Eight Centuries of Financial Folly," economists Carmen Reinhart and Kenneth Rogoff review hundreds of financial crises and conclude that the United States cannot avoid the negative outcome that has befallen every overly indebted nation. In their words:

"Highly leveraged economies, particularly those in which continual rollover of short-term debt is sustained only by confidence in relatively illiquid underlying assets, seldom survive forever, particularly if leverage continues to grow unchecked."

"Leverage" is a financial term for borrowing or debt. America’s nearly $17 trillion sovereign debt jeopardizes the nation’s long-term economic well-being.
Ironically, in positing his theory, one of Keynes’ primary goals was to avoid negative long-term economic consequences. Because too many empirical examples discredit Keynes, and because they oppose unnecessary debt and high taxes, fiscal conservatives remain skeptical of Keynesian-style government intervention in markets.

Keynesians must be skeptical, too, because his followers have never comprehensively applied Keynes’ theories. Instead, even in a flat economy, today’s "Keynesians" have replaced Keynes’ original speculations with "Keynesianism 2.0" – higher taxes, artificially depressed interest rates, relentless deficit spending and debt accumulation that plunder the wealth and financial security of current and future generations – and are attempting to obscure their negative results by pumping new, seemingly endless supplies of cheap, unsecured money.

Lord Keynes is dead, literally and figuratively. His followers have failed him – and they have failed America.