Throw Keynesian Economics on the ash heap of history

Perhaps the greatest achievement of the Obama Regime will be demonstrating the utter foolishness of Keynesian economics.

For those who don’t know about Keynesian economics, it’s a theory that increased government spending boosts the economy and less government spending retards the growth of the economy. Under this theory, if government spends more money (running up the debt) during a down business cycle, that cycle will be shallower than it otherwise would be. The government can then cut spending and pay off the debt with the surplus during higher business cycles. The lessened government spending then reduces the maximum, smoothing out the business cycle.

The problem, Keynesians say, is that politicians are reluctant to cut spending and pay down the debt during good times. That is only the first problem with their theory.

The main problem with Keynesian economics is that the theory doesn’t work at all! President Obama and his Democratic allies in Congress have piled up more debt in 18 months than all the previous Presidents from George Washington to Ronald Reagan and we’re still mired in an economic slump. If Keynesian economics had any element of truth or efficacy, the economy would be booming. There would be virtually full employment and everyone would be doing better, kind of like what happened about a year after President Ronald Reagan’s across-the-board tax cuts took effect.

Of course our Government officials subscribe to this failed Keynesian theory, they get to spend more money paying off the special interests that fund their campaigns and buying votes from We the People with our own money.

It’s well past time to throw the failed Keynesian economic theory on the ash heap of failed theories once and for all.

Dan Mitchell, who writes the International Liberty blog, agrees.  Here’s a video he made that spells it out.

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4 Responses to Throw Keynesian Economics on the ash heap of history

  1. Daniel says:

    First off, I agree the pure Keynesian Economics is probably an overly-simplified solution (though I personally believe that the current mire of regulation is the largest issue for the economy turning around) But I want to see how you respond to these claims/facts, mostly because I feel like being young and living in an urban area I get mostly the liberal side of things and I’d like a conservative perspective (having said that I currently believe both parties get some things right and some things wrong):

    1. Reagan’s across the board tax cuts were actually a tax hike for most businesses because while the nominal rate was lowered, significant loopholes were also filled.

    2. What about the idea that the recession would have been worse had it not been for the (massive) spending packages? I guess what I am saying is how do we know? (also I’m partial to ARRA because they are improving freeways near me and paying part of my salary…but I guess that’s some bias)

    3. I would say that I agree that the federal government is too big but the fact is that 2/3rds of government spending is in defense, medicare/caid, social security, or interest (sad), so what would be your plan to fix it?

    Thanks Uncle Steve

  2. Turophile says:

    Hi Daniel,
    Thank you for commenting on my blog. I really appreciate it.

    I think you are absolutely correct that over regulation is a huge wet blanket on the economy. It leads business leaders, including small businesses, to be apprehensive about what the next regulation is coming down the pike. This apprehension leaves them unwilling to expand their businesses or hire more people, lest any new regulations make that risk unprofitable.

    1. You are right that Reagan’s tax cuts included loophole closing. Some businesses may have faced higher taxes as a result of their favorite loopholes being closed, but it also allowed businesses (and people) to base their decisions on economic consideration rather than on tax code considerations. They could make economic decisions based on their own enlightened self-interest and unique situations instead of the preferences of 535 politicians and untold numbers of IRS bureaucrats in Washington, D.C. As a result, capital was allocated according to it’s most efficient use, instead of that preferred by the Federal bureaucracy.

    2. We can’t know for sure except that when government takes money out of the private sector and spends it, it does so in a political way instead of an economic way. I’m glad that someone I know is benefiting from ARRA, but it was VERY expensive and the numbers show that only a small percentage of the money went to uses that benefit most of us. Most of the money went to repay the President’s campaign contributors. For example, Solyndra received over a half billion dollars, structured so the taxpayers get paid LAST, after Obama bundler George Kaiser, one of the 100 richest people in the world, who paid NO federal income taxes for years. (Ref. That’s pretty corrupt, if you ask me.

    3. You are correct as far as approximately 2/3 of the budget being allocated to those 4 items. I would like to remind you that the only one of those four that is authorized by the Constitution is national defense. IMHO, everything not specifically mentioned in the Constitution that the Federal government does should be ended, either devolved to the States or abolished. For a more complete discussion of my views, see my page on Constitutional Government.

    • Daniel says:

      First off, I looked up Turophile, very cool! I believe, I too am a turophile.

      1. That point about making decisions economically rather than on taxes makes a lot of sense. However, how do you feel about taxes as used as a tool for encouraging things that the free market wouldn’t provide on it’s own? The best example for business being R&D money. R&D has some of the highest (long-term) returns of any business spending, however those returns are not realized for many many years. But because R&D funding is tax deductible companies spend money on R&D. Additionally, the US government provides something like 80% of the money that goes into research in the United States (which is still the scientific capital of the world….). Without this tax incentive/spending I believe research wouldn’t get done or at least would be much much less, because the steps from research to profit are usually long and convoluted.

      So in that sense some business taxes are necessary to make sure that taxes remain a tool to encourage the market, but I do believe that our business taxes are too high, especially since big companies who could deal with the taxes, pay a fraction of the nominal rate and small companies don’t usually get the same deductions AND also still have to cover the other 6% (4%?) of the SS tax.

      2. Yes, I think the fact that Obama gave significant money to campaign donors is wrong (but almost all politicians would have done the same if they *had* to give out 800 billion dollars, not that). Though money going to Americans is still money going to Americans. I mean what happened to the 560 million Solyndra was in the hole? I don’t know exactly but a lot of it probably went to pay the wages of some workers (over 1000 at some point….) and a lot went to build their factory, and a lot went to buying the machines that made the panels. It seems like the more money that is circulating the better the economy does. Is it worth it to mortgage our future? I don’t know, but I still believe the stimulus helped because of my understanding of how the economy works (even if it doesn’t feel like it).

      3. What about Social Security? It would be great if it’d never existed, but now that it does it seems like we’re stuck since everyone plans their retirement including social security (and have been paying the tax for decades). If it was given to the states to own, some would keep it and some would throw out the program. Then all the old people would move to the SS states, who would be crushed under the additional load of people on social security, and then no states would have social security, so it doesn’t seem feasible to move social security to the states to me. But maybe I have missed something….

      Anyways thanks for your reply.

      • Turophile says:

        You may be a turophile, too, but I’m the one living in turophile heaven. Can you get fresh curd there? … so fresh it squeaks on your teeth? Can you watch the cheese makers scoop the curds out of the vat after draining off the whey? I rest my case. The weather is nice there, if you don’t mind not having four distinct seasons. Anyway …

        1. Most basic scientific research is done at universities with government funding. Most business R&D has a shorter timeline, but still would be funded if there was a sufficient economic payoff. When I worked at GM, I was told to look for money saving ways to change things, that saving even only a penny per engine would amount to thousands of dollars and could result in a nice bonus.

        I think taxing businesses is stupid. For a thorough explanation, see my essay here.

        2. Money in Americans’ pockets is undeniably a good thing, but to have the government take money out of the lower and middle class’ pockets, especially those that haven’t started paying taxes yet because they’re still in elementary school or haven’t been born yet, and put that money in George Kaiser’s and other rich Obama donors’ pockets is thoroughly corrupt in my estimation. Thomas Jefferson said in a letter to John Taylor in 1816: “… the principle of spending money to be paid by posterity under the name of funding is but swindling futurity on a large scale.”

        3. Social Security, I believe, is a special case, in that it is essentially a contract between We the People and our government, that if we pay these taxes now, it will be returned to us in our retirement. As we know, it’s basically a Ponzi scheme that depends on many more workers than retirees. When it was established and the retirement age set at 65, most people died prior to their 65th birthday. Today, with people living into their 70s and 80s, as well as there being fewer young workers to support more elderly retirees, it is actuarially unsustainable. It’s going broke, soon!

        There is a proven solution, however. Chile faced a similar problem, but with their smaller size and capitalization, they were going broke faster. They came up with a solution that established effectively a two track system. They kept the current system as one track for those who are retired or about to retire (55 and older). The other track was a carefully designed free market system for younger workers (under 30) that worked like a super 401K. The workers between 30 and 55 could either stay on the old system or opt for the new system. Many people opted for the new system because the returns on investment were far better and they could pass on any left over funds to their heirs when they died. I believe a system like this could work here in the U.S. if the Democrats would quit demagoguing the issue, trying to scare senior citizens into voting for them.

        I hope this helps clarify my views, Daniel. Thank you for commenting.

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