Keynesians Are Lousy Historians (And Worst Economists)

Member Group : Jerry Shenk

When and how did austerity become "unhealthy?"

America isn’t "starved" for revenues.

America receives more tax revenues annually than any nation in history, but, in each (but one) year since 2009, government expenditures exceeded Treasury receipts by more than $1 trillion — yet politicians urge greater spending.
During the early 20th Century, when economist John Maynard Keynes became fashionable, the governments of most prosperous nations — and their debts — were small, certainly when compared to today’s behemoths.

Then, Keynes’ notion of "increasing aggregate demand" through deficit spending was considered 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 modern Keynesian answer to economic downturns — increased spending and debt — assumes the willingness of bond markets to finance debt at acceptable interest rates.

Since 1920, periods of American and European austerity have refuted Keynesian dogma.

Since 2008, despite a huge Keynesian stimulus and the monetization of $4 trillion-plus in debt which failed to attract investors, American unemployment remains high, and recovery is disappointing.

The Washington Post’s Robert Samuelson noted that the sum of six years of budget deficits and Federal Reserve cash infusions is nearly $10 trillion:

"It’s hard to believe that all this stimulus didn’t aid…recovery, but the fact that it resulted in only modest growth has created an identity crisis for economists. [Keynesians promised] that, through suitable economic policies, they could produce long periods of stable growth and…avoid prolonged slumps and lengthy periods of substandard growth," he wrote.

History proves (at least) three things: 1) Austerity works and 2) Keynesianism always fails, in part, because 3) Keynesians are lousy historians.
Since 1920, periods of American and European austerity have refuted Keynesian dogma.

Because the facts don’t fit their narrative, Keynesians never mention the American Depression of 1920-1921 or explain its recovery.
President Warren Harding cut the federal budget 48 percent from 1920 to 1922 The economy boomed.

Harding’s successor, tax-cutting, budget-slashing President Calvin Coolidge, continued Harding’s fiscal prudence, spending less in 1928 than Harding did in 1922.

America enjoyed "Coolidge Prosperity," nine years of budget surpluses and a world-best economy.

The boom ended when the market corrected investor overconfidence and carelessness.

As World War II wound down, Congress and President Harry Truman cut spending by 75 percent, from 44 percent of GDP in 1944 to 9 percent in 1948.

Horrified, prominent Keynesian economist Paul Samuelson predicted "the greatest period of unemployment and industrial dislocation which any economy has ever faced." Other Keynesians predicted violence in American streets.

Samuelson advocated a more gradual spending drawdown. Washington ignored him.
America’s post-war economy thrived.

Despite rapid demobilization, there was no mass unemployment.

True, the numbers of unemployed increased, but 2.3 million unemployed in a civilian labor force of 60.1 million meant an unemployment rate of 3.8 percent, far superior to today’s politically-understated 6.3 percent.

President Truman said it was "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 expanded again after the Cold War ended and overall federal spending fell from 22 percent of GDP in 1991 to 18 percent in 2000, when real GDP began growing 3.8 percent annually, on average.

Robert Barro, a Harvard professor of economics and senior fellow at Stanford’s Hoover Institution, wrote about modern Europe: "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?…
" [T]here is nothing in the overall Organization for Economic Cooperation and Development data since 2009 that supports the Keynesian view that fiscal expansion has promoted economic growth."

Barro concluded: "[T]here is a lot to say on economic grounds for strengthening fiscal austerity in OECD countries."

That applies to America as well.

The Bureau of Economic Analysis reported that, despite a 4.6 percent cut in federal spending, third and fourth quarter 2013 GDP grew fastest since George W. Bush’s presidency.

America and European countries suffer from decades of over-promising, overspending, and over-indulging special interests. History suggests that, if America embraces austerity along with tax and regulatory reform, the economy will flourish.