The Keynesians Were Wrong Again

The Keynesians Were Wrong Again
We won't see a return to growth without incentives for job-creating investment.

By PETER FERRARA

From the beginning, our representatives in Washington have approached this economic downturn with old-fashioned, Keynesian economics. Keynesianism—named after the British economist John Maynard Keynes—is the theory that you fight an economic downturn by pumping money into the economy to "encourage demand" and "create jobs." The result of our recent Keynesian stimulus bills? The longest recession since World War II—21 months and counting—with no clear end in sight. Borrowing close to a trillion dollars out of the private economy to increase government spending by close to a trillion dollars does nothing to increase incentives for investment and entrepreneurship.

The record speaks for itself: In February 2008, President George W. Bush cut a deal with congressional Democrats to pass a $152 billion Keynesian stimulus bill based on countering the recession with increased deficits. The centerpiece was a tax rebate of up to $600 per person, which had no significant effect on economic incentives, as reductions in tax rates do.

Learning nothing from this Keynesian failure, which he vigorously supported from the U.S. Senate, President Barack Obama came back in February 2009 to support a $787 billion, purely Keynesian stimulus bill.

Even the tax-cut portion of that bill, which Mr. Obama is still wildly touting to the public, was purely Keynesian. The centerpiece was a $400-per-worker tax credit, which, again, has no significant effect on economic incentives. While Mr. Obama is proclaiming that this delivered on his campaign promise to cut taxes for 95% of Americans, the tax credit disappears after next year.

The Obama administration is claiming success, not because of recovery, but because of the slowdown in economic decline. Last month, just 216,000 jobs were lost, and the economy declined by only 1% in the second quarter. Based on his rhetoric, Mr. Obama expects credit for anyone who still has a job.

The fallacies of Keynesian economics were exposed decades ago by Friedrich Hayek and Milton Friedman. Keynesian thinking was then discredited in practice in the 1970s, when the Keynesians could neither explain nor cure the double-digit inflation, interest rates, and unemployment that resulted from their policies. Ronald Reagan's decision to dump Keynesianism in favor of supply-side policies—which emphasize incentives for investment—produced a 25-year economic boom. That boom ended as the Bush administration abandoned every component of Reaganomics one by one, culminating in Treasury Secretary Henry Paulson's throwback Keynesian stimulus in early 2008.

Mr. Obama showed up in early 2009 with the dismissive certitude that none of this history ever happened, and suddenly national economic policy was back in the 1930s. Instead of the change voters thought they were getting, Mr. Obama quintupled down on Mr. Bush's 2008 Keynesianism.

The result is the continuation of the economic policy disaster we have suffered since the end of 2007. Mr. Obama promised that his stimulus would prevent unemployment from climbing over 8%. It jumped to 9.7% last month. Some 14.9 million Americans are unemployed, another 9.1 million are stuck in part-time jobs and can't find full-time work, and another 2.3 million looked for work in the past year and never found it. That's a total of 26.3 million unemployed or underemployed, for a total jobless rate of 16.8%. Personal income is also down $427 billion from its peak in May 2008.

Rejecting Keynesianism in favor of fiscal restraint, France and Germany saw economic growth return in the second quarter this year. India, Brazil and even communist China are enjoying growth as well. Canada enjoyed job growth last month.

U.S. economic recovery and a permanent reduction in unemployment will only come from private, job-creating investment. Nothing in the Obama economic recovery program, or in the Bush 2008 program, helps with that.

Producing long-term economic growth will require a fundamental change in economic policies—lower, not higher, tax rates; reliable, low-cost energy supplies, not higher energy costs through cap and trade; and not unreliable alternative energy surviving only on costly taxpayer subsidies.

Unfortunately, Mr. Obama seems to be wedded to his political talking points, and his ideological blinders seem to be permanently affixed. So don't expect any policy changes. Expect an eventual return to 1970s-style economic results instead.

Mr. Ferrara, director of entitlement and budget policy for the Institute for Policy Innovation, served in the White House Office of Policy Development under President Reagan, and as associate deputy attorney general of the United States under the first President Bush.

http://online.wsj.com/article/SB10001424052970203440104574400580004827114.html?mod=djemEditorialPage

 

Fantastic article.

All this stimulus spending is bullshit and just steals future demand to present.

Without job creation (and decent wage jobs), any prospective recovery is doomed from the outset.

Jobs, jobs, jobs.

There are a select few imbeciles who can't seem to wrap their heads around the simple premise that people without jobs or money aren't going to buy shit even on a 10 year, no interest, no payment installment plan, nor can they get credit or loans.

 

I agree.

 

You're out of touch, and all of your posts are dominated by your bias. Even if real unemployment numbers are closer to 20%, that means 80% still have jobs. On top of the falling demand for consumer credit, there is massive debt repayment ongoing. Another year or two of that and you have major seeds being sewn of pent up credit and goods demand.

The marginally weak in an economy going through structural changes are not going to drag the whole thing down. The totally 'tapped out jobless folk' you refer to are not the majority of people out there ... in fuzzy numbers, they are a marginal 15-25% . The rest as an aggregate have an enormous earnings capacity and aren't under this sort of stress. And just maybe the top 1% or top 5% will gain even more wealth from the lower 99% by the time this is cycle is over. Perhaps this is class dichotomy and redistribution of wealth, but it is nothing unusual for a capitalistic economy. Get some perspective ...

When I read everything you say, I take into account you are of the category of 'structurally unemployed (trader/gambler as a last resort?)' and just very upset about it, and generally are projecting. Not to say that isn't lousy, and I do feel for ya, but there are plenty of professions -not- left behind. Look at biotech, health care, gold mining, and countless others.

In the long run, those left behind and untrainable pass and new ones are born better inclined to do what modern society demands. Not the end of the world, just evolution of the labor force.

The reality is that technology has been and will continue to facilitate continuing massive productivity increases and lessening the demand for labor. The cycles make this all the more noticeable. The wealth gets redistributed to the top in this process, accentuating the pain for the masses. I see nothing wrong with Keynesian policy as a way to redistribute some of that wealth from the top back down (ie govt funded jobs) ... If we need to pay people to do nothing, it is a sign of our success and efficiency from technology gains. I'm all for redistributing work hours so everyone has some work...

 

Keeping assuming.

Edited by moderator

 

You are clueless on economics if you can't recognize the U.S. economy is undergoing the biggest structural change in its economy since the 40s, but this time, wages and employment levels are on a negative long term trend, not a positive one.

All the people talking about China compensating for the loss of U.S. consumer purchasing power aren't listening to the Chinese Premier, who is warning the world China's economy is dependent on stimulus, is 1/6th the size of the U.S. economy, and don't realize most cars sold in China are much lower unit cost vehicles than almost any other place in the world (Wuling, for example, a subsidiary of GM, sells minivans for $3,700) as is the case of other goods and services.

-Calling China's economic recovery unsteady, Premier Wen Jiabao vowed Thursday to maintain stimulus measures to combat the global downturn.

"We cannot and will not change our policy," he said in his keynote address during the opening ceremony of the World Economic Forum (WEF) in Dalian, Liaoning Province.

http://news.alibaba.com/article/det...1-chinese-premier-vows-continue-stimulus.html

China can afford this, now, as they're at least in the black, so they're not building the foundation for higher taxes and business costs in the future.

Right now, many U.S. companies are continuing to cut costs by taking the step of firing highly paid executives, and promoting their underlings while paying them maybe 55% or 60% as much.

Companies have been surviving by cutting costs, which is not a viable long term strategy for survival.

You are as clueless and naive on economic matters as anyone I've had the misfortune and pain of hearing from.

Keep worshiping at the altar of Obamanomics, which is going to drive a spike in the heart of this economy for good - extreme taxation and welfare state-ism is on its way, thanks to your good buddy Keynes.

While we're at it, lets give free health care, cars and homes to everyone in the U.S.

Free stuff and stimulus forever in the U.S.!

 

Hey ByLo, I've been reading your posts for some time and we are very like minded. I don't know if I should be worried about that or not.

I don't think anything this country is experiencing is by accident. We have been "too rich" and "too powerful" for too long. The re-distribution of wealth has been occurring on a global scale for a while.

I'm old enough now where I have experienced opportunity that this country once offered, building a business from scratch and reaping the rewards. My two sons are in college now, both doing well, but both disillusioned as to why they are there. They both have the drive to succeed, but the older has voiced many times as to what is the point if he will just get it taxed away and given to the lazy.

I can't say I blame him.

 

Well, my views are shaped in large part by the only guy I personally know who was sounding the alarm bells back in 2007, who warned that the issues of job losses and massive debt (government, leveraged companies and individual consumers) were going to take down the U.S.economy, and that any other issue was window dressing.

He happens to be in his late 60s, and literally everything he predicted has come to absolute fruition.

All this talk we hear on CNBC and from the shill mouthpieces of Wall Street is puffery and bullshit if it doesn't relate to jobs and debt, period.

Lower the interest rates to negative levels, and see how helpful it is if small businesses and consumers keep losing money, jobs, wealth (devaluation of homes and other assets) and access to credit.

And then the globalists' delusions will be shattered, also, when the U.S. ultimately drags every economy in the world down.

China's economy still a literal fraction of ours.

U.S. consumers are the biggest fish in the sea, still today, by a wide margin.

As a point of proof, China is only able to maintain growth by record stimulus spending to spur domestic compensation and try to stave off the adverse effects of their 41% (so far) drop in exports to the U.S., but even China can't continue 580 billion USD stimulus packages forever.

Jobs and Debt.

 

By the way, I owe that "guy" I am referring to in my previous post eternal gratitude, as he's the singular person who convinced me to sell a good chunk of my real estate holdings off between late 2005 and 2007, which I have to admit I never would have done with out his persuasion, and I'd be f**ked now if I hadn't.

That's a great example of why it's wise to seek out the advice and listen to the wisdom of people with more life experience, especially when they've reduced seemingly complex issues to basic truths, which isn't so easy to do.

Jobs and debt.

 

BuyLo,

I'm not trying to be a jerk, but you really only knew one person that was predicting this would happen?

I must've heard about 3 people every day predict that this would happen. I was one of the people predicting that this would happen, because it was probably the most obvious financial development during my lifetime.

I applaud you for actually acting on it, as most people would've just held and hoped.

Personally, one month before the downturn I cashed in all my company stock options, and transferred 100% of my 401K out of equities and into fixed income.

I sold my home and moved into an apartment in '06. Then broke ground and built a much nicer home for a fraction of the cost late last year. I now have almost 50% equity in a much more desirable home.

I'm not saying that I'm a genius. Just that this was completely obvious to anyone who wasn't biased. I'm only 30yo. You didn't have to be a veteran to see this one coming.