Tuesday, June 29, 2010

Keynesian Economics Is Like A Drug Addiction

In the 1930's, FDR used excessive Federal spending, a cornerstone of Keynesian Economics, in an attempt to revive the U. S. economy during the Great Depression. It failed. At the same time, Europe recovered much quicker without the spend-thrift precepts of Keynes insanity. In retrospect and in a futile attempt to save Keynesian Economics from the trash heap of economic theory, those "apostles of John Maynard Keynes" have concluded that Federal spending during the Great Depression didn't produce the intended results because FDR didn't spend enough; and, because he tried to cut spending at the same time.

In the 1970's, the same Keynesian spending programs were attempted by the Democrats and Jimmy Carter; though much more limited than all the spending that took place during the Depression. But the Keynesian practices of that era, too, failed and, once again, the Keynesian economists claimed it was a failure of not spending enough and not a failure in the soundness of their philosophy. However, and in complete contrast to Keynes, Reagan took the reins and applied tax cuts, not spending, and the country righted itself economically.

Also in contrast to Keynes debt deepening beliefs, both JFK and Bill Clinton spurred their economies on through tax cuts; even though the Clinton tax cuts were primarily driven by a Republican Congress and the implementation of Newt Gingrich's Contract with America. Today, Democrats constantly refer to Clinton-economics as being the powerful engine that created a surplus that George W. Bush completely erased. However, in doing so, the Democrats seem to forget that Bush, like so many other Presidents, inherited a recession at the tail-end of the Clinton Presidency and, then, only 9-months into his Presidency, he was hit with the economy killing effects of 9/11. If the Democrats would simply put ideology aside, they would have to truthfully agree that it was the Bush tax cuts that produced a gradual erasure of the deficits for each year following 2003 until the housing bust and recession that started in 2008. This was despite all the spending for two Wars and the dumb excessive spending by the then Republican-controlled Congress.

Now, we have Obama and his economic team. Once again, the principals of Keynesian economics are being applied with all kinds of Federal spending; from the TARP to the Stimulus Package. And, as had been the case in the application of all Keynesian economic spending in the past, our economy seems to be stalling out after only 16 months since the Stimulus was implemented. Now, as before, there are calls for even more spending.

The trouble with Keynesian economics is that all those massive infusions of cash have only a small and temporary impact on the economy. To sustain the benefits, you have to keep repeating the programs until, literally, you go broke doing it. Much the same way a drug addict keeps needing more and more "fixes" to satisfy their habit.

Two perfect examples of this were the "Cash for Clunkers" program and the first-time home buyers tax credit. Both programs created increased buying in their respective areas of the economy. But, once these programs ran their course, the buying not only stopped but, it fell far below the buying that had been seen prior to the implementation of either of these two programs. Of course, this fact, as in all the cases of all other applications of Keynesian economics, resulted in calls by the auto and home industries and some Democrats to extend the spending. And, so, the parallels to drug addiction.

The problem with Keynesian economics is that the effects are always short-term. They focus too much on growing the government when it is the private sector that actually grows the economy. The government, through taxing, only saps our economy. That's why tax cuts and not government spending have always produced better results. Proof of the addictive behavior of Keynesian spending comes from the likes of lefties like Paul Krugman and Robert Reich who are screaming that we need more and more spending. Obama, too, being a good little Keynesian, has warned the G20 member heads of state to keep the spending going to save the world's economies. However, history has proven this to be a flawed belief and most of those G20 members have seen the light. In a direct slap at Obama, most will now cut spending and, maybe, some taxes to save their economies from completely collapsing under the failure of Keynesian spending. Mr. Obama would be wise to follow their lead and dump his head-strong big government philosophy; unless, of course, his true intent is something other than saving our economy from a deep recession.

1 comment:

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