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The Keynesians Were Wrong Again

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


    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.

  2. 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.
  3. I agree.
  4. 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...
  5. Keeping assuming.

    Edited by moderator

  6. 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.


    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.!
  7. 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. :D

    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.
  8. 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.
  9. 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.
  10. 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.

  11. when does government get too large? when does the spending create too much of a tax and inflationary burden. When is it that government paid workers are paid so well that the private sector can not handle the burden.

    See California....
  12. I'll be absolutely honest: I had convinced myself that bad things were going to happen, but I underestimated the severity, and more importantly, I wouldn't have sold off such a major chunk of my assets, which is a big step and takes a big level of confidence, if it hadn't been for his counsel.

    There were other people warning of some red flags and such, but they're comments were no where close to being as particularly spot on as the gentleman I'm referring to.

    Ominously, he sees absolutely no light right now because no one with credibility can point to a real reason to believe in job growth, let alone quality job growth. Even Wall Street, with high paying jobs, is cutting pay and workers, and the signs point to a permanently shrunk financial sector there (not that a heavy reliance on financial services has been a boon to many nations).

    All this talk of windmills and solar panels - he's as skeptical of that as rainbows and unicorns, and there's not really any reason to disagree, when oil, coal and natural gas producers can ramp up production, lowering costs, to kill off those higher cost alternatives, any time they want.

    No one can answer the critical question of where the new jobs in the U.S. are going to come from. We can't just keep relying on the government to hire people, as that's one of the reasons our debt and deficits have exploded (and local units of government are starting to cut pay and jobs), and health care services are beginning to soften.
  13. To the OP,

    I'm never really a proponent of Keynesian policies, but we should be fair in saying that there were huge flaws in Reagan's policies also.

    If a person were to argue that it was Reagan who started the mess that we are in right now, I would have a hard time arguing against that point. This is coming from a Reagan fan.

    Reagan did what was necessary to accomplish his objective. This included massive debt spending. It could be argued that this kicked off a culture of borrow and spend in this country that just escalated from there, landing us in our current situation.

    So he accomplished his objective, and the borrow and spend policies should've died there, but they didn't. Now we muct decide if we want to return to the status quo. If the answer to that is yes, then the government is probably taking the best step that they realistically can. That is, tell the people whatever they need to hear to allow you to inflate the currency as quickly as possible. While this screws most everyone for generations to come, the other side of the coin is that homes retain their value. Bad debts are resolved at banks, as within a couple years wages increase to counter inflation.

    Conversely I would argue that we shouldn't return to the status quo, but that would require the government to sit on their hands and let us reach equilibrium. Not gonna happen.
  14. Make no mistake, there will be a shift to solar power during my lifetime. That is completely obvious. For the most part I'm not sold on wind power for most locations. It makes sense in some locations though. This is coming from someone who has incentive to talk it up as much as possible.

    I think that a lot of people really haven't kept up with solar technology during the past 2 years. It is almost viable for the average joe right now, with what are essentially garbage panels. They are on average only 20% efficient. There are already huge advancements coming down the pipe, and costs have plummeted. All this while oil dropped to $30/barrel.

    OTOH, this sector will not provide a huge number of jobs. In fact, it won't even provide a noticeable number of jobs.
  15. homes is not everything

    resolving debt this way probably will restrain new private credit for years

    wages will not increase to counter inflation as global workforce competition and local unemployed will pressure wages

    overall reliance on growth model might be not sustainable
  16. The current president ran on a platform of not continuing the status quo. It is curious they are doing just that in an attempt to prop up the economy, not just to boost confidence in the current administration so they can gain support for their reforms, but also to help keep their overwhelming control of Congress the next election cycle.
  17. What Keynesianism?

    There is very little real keynesianism now.
    The iraq war is almost over.
    Afganistan is too cheap.
    No new fighter jets.

    Health care is NOT keynesianism.
  18. The Libtards can't see far enough ahead to recognize that THIS is what "Obama-ism" fosters. (All they know is "buy a vote today, let somebody else deal with the mess"...:mad: )
  19. Homes aren't everything but it is at the root of the problem. Inflation makes all debt cheaper relative to cost of living. Wages will always keep up, although they do lag inflation during recessions.

    I've not seen much evidence that local unemployed are pressuring wages downward. Most companies do not decrease wages, but rather simply lay people off. The ECI hasn't yet gone negative, and inflation on a consumer level isn't out of control YET.

    Recessions will always result in a cash flow away from the middle class and toward the upper class, as the middle class find themselves much too leveraged and just barely undercompensated. Lower class just continue to be lower class.
  20. The same can be argued by all the supply-side supporters. We've never had real Keynesianism. We've also never really have provide a good environment for supply-side to work.

    Subsequently, both side claim that the other side is a failure. In reality, they are both failures, because they are both just pseudo versions of the real thing. We change presidents and agendas too frequently to create the appropriate environment for either to be fully implemented.

    If completely implemented though, supply-side creates a society where even the poor have a much higher standard of living, in absolute terms. It is a question of the wealth gap. In a true supply side economy, the gap is also larger between the poor and the rich. So even though the poor are better off, the feel as if they are worse off.
  21. do you smoke something?
    if so we would live in a permanent hyperinflation as all debt would evaporate overnight and everyone would be happy

    basically this is life without money or so called communism, if you know

    people who own debt will never allow that

    housing is definitely not the root of the problem

    root of the problem - debt, fiat system and boom bust cycles

    now housing, before that tech bubble, before that ...

    this is how this system works - if not housing it would be something else
  22. 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...

    One of the dumbest shit I've ever read on Internet.WOW
  23. C/mon man. Why do people like you exaggerate and assume that every strategy would continue at a rapid pace in perpetuity? Makes this sort of discussion completely pointless.

    Inflation makes mortgages cheaper. It's a fact. It makes all installment loans cheaper, because historically, wages have ALWAYS caught back up. Debt holders allow it, because they either have no control over it, or because it is better than the alternative of getting stuck owning homes that they never wanted. Lenders know that this is the case and they expect it.

    Of course, the ultimate root of the problem lies in the fiat system and boom/bust cycles. The question is which aspect of a bust cycle is least tolerable by the masses. In this case it is losing their homes. Can it be solved? YES!!! Will it come at the expense of almost everything else? Also a resounding yes.

    Subsequently, food will be more expensive, as will clothing, transportation, rent, and just about everything else. But people will be better able to make their house payment, and subsequently home values will stop declining, and banks will not be worrying about next year's foreclosures.
  24. Keynes wrote when the US was on the gold standard for one thing, going off the gold standard was a big game changer.. for another thing, there is no proof that he was ever correct, it seems like the evidence is to the contrary... his big success was that his ideas are great for the POLITICIANS.... they love that stuff... spend like crazy, usually in the direction of their friends or voting constituency, then retire and live off the fat of the land that they created...

    We don't really have natural disasters or economic disasters of a scope large enough to match our ongoing political disaster... the politicians like to blame everybody else, the Chinese, the Bankers, the opposing party, the economics, etc, the current crop of idiots talks of financial crisis; bullshit, it is a financial crisis as a result of political disaster from the 90's when "deregulation" was the watchword of the day so much that even Clinton let some horrible stuff slip past him.. he was supposed to be so smart but he got bamboozled..... but they are the ongoing disaster that we need to quell somehow...

    Obama had six months to convince the world that the US could have a regulatory system in place that would work and to attain transparency of the toxic assets.... I don't think he's done either of those things and his commie obsession with healthcare reform certainly isn't assuring to anybody that the US is going to be the world economic leader forever...
  25. Sorry but all of the folks I know earning >$150k/pa are tapped out on there home equity, credit cards etc. The issue is bigger than you think. Now the shit has hit the fan funding their kids $40k/pa college education is becoming a big issue. More pain to come.
  26. It seems like everything Obama wants to do
    is against Austrian economic principles.

    We are in the biggest Keynsian experiment
    in history.
  27. Spot on.

    People got so indebted with homes, cars, college tuition, medical bills, and credit card $$$, they're upside down no matter how much they make now that the value of their core holdings have tanked (401(k)s, homes, etc.).

    If they're laid off or even take a small salary or income cut, the musical chairs stop and they have no seat.

    This is why credit to consumers dropped by a massive record in August and will continue to drop - those who want credit can't get it, and those who can get (as few as they are) don't want it.
  28. I don't know what kind of inflation we talk about but
    the only example when we saw wages caught back inflation was 70s

    history full of examples when high inflation didn't increase nominal wages but significantly devalued standard of living

    just came from Ukraine -
    they had credit boom 2-3 years ago.
    currency devalued 100% since last year, inflation is 20% annually for several years - nothing is resolved, credit virutally evaporated, economy went to cash,economy gets worse and worse

    most eastern europe the same thing

    inflating debt doesn't work
  29. That is absolutely 100% incorrect. History is littered with examples to the contrary, where the result is a very long term continual downgrade in living standards, or a complete economic reset through sovereign default.
  30. You don't have to look much further than the rise and fall of the Roman Empire to see the US is on a big downward spiral. The death blow to the Romans was heavy social programs and an unsustainable military abroad. Sound familiar?

    The interest on the US's debt recently exceeded the annual military budget (sorry, no source). The interest on the outstanding debt is rising parabolically. That can only end in one way. No, not default because the government can create as much of its own money as it wants. The collapse of the US will occur when the world loses faith in the currency. When the US dollar is no longer exchangeable for goods and services the country will collapse. A fiat currency will only survive if consumers and producers have faith in the currency. One way to destroy that faith is massive deficits, heavy social programs, and an unsustainable military abroad. The clock is ticking...
  31. Those who wish to promote inflation make note of the [apparent] short-term impact and sell it as a positive. Of course, it is only liars and thieves who push to promote it. (They also tell us "deflation is the great enemy". That too, is a LIE.)

    INFLATION IS THE DESTROYER OF WORLDS... always has been, always will be.
  32. If inflation and wages kept up at the same pace then we have harmony but they don't. Inflation erodes buying power and only serves those at the top because it forces people into taking on debt. A generation ago a person could buy a used car with cash and pay off a new car in 3 years. Today very few can buy a used car with cash and a new car takes 6 years to pay off. This provides a constant supply of cash flowing into the banks. Those at the top are served the best by inflation. For the rest of us? Well, for the rest of us... we'll soon have to send our kids to work at the age of 10 because in another generation families will need 3 incomes to survive.