Obama and the Death of Keynesianism

Government stimulus simply does not work.

For as long as we can remember, a battle has raged between two opposing, wildly contradictory economic philosophies and their views regarding the true source of national wealth.  These philosophies form the underpinnings for the two different models of governance that war for control of the United States: statism, and conservatism.

Thanks to Barack Obama, we may, just possibly, see the end of this great battle and the final victory of truth and right.

The first view is that expressed by Adam Smith, Friedrich von Hayek, Milton Friedman, and other great economists of the past few centuries.  Called laissez-faire economics, after a French expression meaning "Leave us alone!", it's closely related to Reaganomics or supply-side economics.  Basically, it argues that private individuals and companies working for their own betterment will, collectively, increase national wealth and make the whole country better off.

The best thing that government can do to improve the economy is to get out of the way: reduce taxes, reduce bureaucratic red tape, and let private industry do what it does best.  The invisible hand of the free market will do the rest.

Investors will see a potential opportunity for profit and provide funds to pursue it; the company formed will hire people; these new hires will receive paychecks and spend their increased income in the wider economy; and, in so doing, more opportunities will be formed for others to profit.  It's a virtuous cycle!

On the other side, we have demand-side statist economics as epitomized by the famous scholar John Maynard Keynes.  Keynes believed that government could "prime the pump" of a stalled economy through massive deficit spending.  His arguments took total control of our government during the Great Depression; Roosevelt's New Deal, Civilian Conservation Corps, and all the other alphabet-soup agencies stemmed from a belief that if nobody else wanted to spend money the government could and should.

The theory was straightforward: a worker doesn't care who signs their paycheck as long as they get a paycheck.  Whether working for a private company or for the government, individuals with jobs will spend more money than those without, and the economy will be restarted.

Government Creates Wealth?

There's a problem with this plan, though: government is incapable of creating wealth.  Government can certainly take wealth from those who already have it; it can redistribute wealth thus "appropriated" to politically favored targets, as Democratic kleptocrats like John Murtha and Chris Dodd demonstrate every day.

Government is most effective of all at destroying wealth through over-regulation and confiscatory taxes.  But create wealth where it wasn't before?  No government is able to do that.

Some governmental policies and actions can certainly make it easier for private industry to create wealth.  Without a well-ordered rule of law provided by the government, it's very difficult for honest workers to hold onto their earned property so they're less likely to work hard to get it.  Investment in necessary infrastructure makes the conduct of profitable business far more likely, as America's history of profitable investments from the Erie Canal through the interstate highway system makes clear.

Not being profit-seeking entities, governmental bureaucracies simply do not have the right feedback mechanisms to make wise and profitable economic decisions overall.  If they were, the Soviet Union would not have collapsed in poverty and failure!

The old USSR worked very hard to construct modern infrastructure all across the world's largest country in some of the world's most punishing terrain and did a pretty successful job.  But create a wealthy country?  Hardly.

This is because, contrary to popular belief, government cannot create money or value out of nothing.  It has to get all its money from somewhere, and someone, else.

We're all familiar with paying taxes, the most visible source for government money.  Government can also steal our wealth invisibly by printing more dollars and causing inflation, thus making each dollar in our pockets worth less.

Temporarily, government can appear to create money by borrowing it, but this is not "new" money any more than running up your credit card makes you richer.  You have to pay it back sooner or later, and when you do, then you'll be poorer than you were in the first place.

Americans know this: every dollar spent by the government is yanked straight out of their hide or their children's.  Not so with the money you pay to a business in exchange for goods or services: you can choose to buy from a particular business, or not, as you prefer.

The only way a business receives money is from people voluntarily giving it to them in exchange for something they view as more valuable to their lives; in this way is value actually created, not just moved around or destroyed.

Would anyone voluntarily send money in exchange for the services provided by, say, the National Endowment for the Arts or the Environmental Protection Agency?  The whole reason these agencies even exist is precisely because people, left to their own devices, didn't want to spend their money that way.

Alas, we are ruled by people who believe that they know better than you, and they have the power to take your money and use it in the way they think best.  Nothing to do with value, productivity, or wealth; simply raw power, fueled by a statist elitism and arrogance.

Yet, during the time of the Great Depression, traditional American capitalism was believed to have failed.  After all, did not the stock market crash, wiping out thousands of individual small investors?  Did not private banks collapse, destroying the life savings of Farmer Brown?  Would not a "brain trust" of America's smartest intellectuals be able to provide better order and guidance than millions of more proletarian folks could do?

No.  The Roosevelt administration spent relief money like a drunken sailor, yet here's what his Treasury Secretary Henry Morgenthau had to say about the results:

We have tried spending money. We are spending more than we have ever spent before and it does not work... After eight years of this administration we have just as much unemployment as when we started... and an enormous debt to boot!

Only when the Second World War destroyed all the other industrial nations of the world, creating unlimited demand for American manufactures, did our economy recover and the Great Depression really come to an end.

History Repeating as Farce

Ah, say the Keynesians, we know why the New Deal had problems.  It wasn't because there was anything wrong with Keynes' ideas, nor Roosevelt's.  The trouble was those horrible Republicans and conservatives on the Supreme Court, who struck down large chunks of New Deal legislation and spending that would have made all the difference.  If only FDR had been allowed to spend even more, all would have been well!

After a frustrated and dejected seven-decade wait, finally Barack Obama has provided liberals the opportunity for Keynesian revenge.  Practically his first legislative act was to pass the $700 billion "stimulus" package which, we were told, would surely reverse ballooning unemployment.  How's that working out?

This graph speaks for itself, but for the benefit of Mr. Obama's economic team when they read this, we'll explain.

The light-blue line was the unemployment rate projected by Mr. Obama's own economists if they did nothing at all - at the time, they portrayed it as a worst-case scare-tactic scenario.  Instead, if the stimulus plan they prescribed was enacted, we'd get the not-so-bad dark blue line.

The stimulus plan was passed, and what happened?  The red dots show the real, actual unemployment numbers... which were worse than the worst-case no-action projections!

At best, the stimulus plan accomplished nothing whatsoever while $700 billion taxpayer dollars were flushed down the toilet.  At worst, as Republicans argue, the stimulus plan made the economy worse than it would have been if we'd left it alone.

This is because American businesses and taxpayers realize that they are going to have to pay the Chinese back all that borrowed money so instead of investing and hiring, they're hanging onto their cash to meet the inevitable tax increases that Congress is already working on.

Everybody in the Obama administration seems to be totally shocked; if only they'd phoned up Nancy Reagan's astrologer and summoned forth the shade of Treasury Secretary Morgenthau, they'd have received enlightenment from one of the gods of modern liberalism and been told this wouldn't work because he already tried it.

The Rule to Follow

So, let's sum up: America has enacted, by far, the largest economic stimulus government spending plan in all of human history.  America's government has spent, by far, the most money in the shortest time in all of human history.  America's national debt has skyrocketed from already being the largest in human history to something visible to the naked eye in galaxies far, far away.

What has all this spending accomplished?  Zilch.

It's time to throw the idea of Keynesian stimulus into the dustbin of history where it belongs, right next to Karl Marx and his socialist claptrap.  Government stimulus may sound great in theory, but in the real world, it just plain doesn't work.

It is simply not possible for us to spend any more - there's not enough money left in the whole world!  The model has been tested to destruction, and destroyed it has been.

Now it's time to invoke a different, more fundamental, and far more useful rule of economics: When you find yourself in a hole, first, stop digging.

Petrarch is a contributing editor for Scragged.  Read other Scragged.com articles by Petrarch or other articles on Economics.
Reader Comments
The concept of priming the pump isn't too bad, it is the people charged with doing the pump priming that is the problem. Being in government, they are either corrupt, or surrounded with corrupt people hounding them for a hand out. So the money gets spent on foolish projects. Industry, given a research grant, will ask themselves not how the money can be given to their buddies, but how it can be spent to enhance the company's future.

I feel we are fighting the revolutionary war all over again. Those who were for corrupt big government represented about 1/3rd of the people then, and 1/3 of the people now. We have forgotten what we had learned then.
February 2, 2010 9:05 AM
Great article
February 2, 2010 9:45 AM
The current plan by Obama to encourage job growth is more likely to destroy small businesses. A tax credit to encourage hiring sounds good. However, a company that is ready to expand will do so anyway without the tax credit. A company that is not ready to expand will lose its competitive edge at best and go out of business at worse.
February 2, 2010 10:33 PM
Keynes died in 1946.

He never got to comment about how much sense redesigning cars year after year did not make when everyone knew WWII planes could do 400 mph.

Modern economists don't say how much has been lost in Demand Side Depreciation due to planned obsolescence since 1946 so trying to blame Keynes for anything now is totally ridiculous. Don't economists have enough computing power to do the calculations? Keynes never had any electronic help.

February 17, 2010 7:33 PM
Economics is by its nature a social science. You can not use the scientific method, nothing can ever be proven. Simple concepts, such as supply and demand curves intuitively make sense and seem by all accounts to fit with reality.

Something as complex as 'what effect with the stimulus have on the economy' is impossible to put into a computer. I am sure that there are models of the economy but they all make assumptions which may or may not be true.

Even something as simple as a supply curve can not be measured perfectly. A few data points can be learned and a curve can be guessed at but it certainly won't be perfect. Even worse any change in the economy will make that supply curve change.
February 18, 2010 12:27 AM

Could it be that Keynesianism has killed Keynesianism?

We have had decades of economists thinking they are as smart or smarter than Keynes giving idiotic advice to politicians based on their interpretation of Keynes' ideas. They have thereby created conditions never foreseen by Keynes. Of course they do not have any new or good ideas of their own, hence this mess.

October 12, 2015 6:46 PM
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