Our President and all the Krugmans and Ezra Kleins out there refuse to face the fact that Keynesianism is dead.
Last Friday’s report on economic growth for the second quarter of 2011 completes the burial of Obamanomics. The economy grew a paltry 1.3% for the quarter, with reported growth for the first quarter reduced from a meager 1.8% to a negligible 0.4%. The economy for the entire year so far has actually grown less than the weak growth we thought we had for the first quarter alone.
The growth for the fourth quarter of 2010 was also reduced to 2.3%, meaning that for the last nine months the economy has grown a minimal 1.5%, barely treading water as the weekend Wall Street Journal described it. For comparison purposes, economic growth during the first seven quarters of the Reagan recovery in the 1980s boomed at an average of 7.1%. Economic growth during the first seven quarters of the Obama non-recovery has now been reduced to an average of 2.6%, barely a third as much.
Historically, as the Journal also reiterated, “the deeper the recession, the more robust the recovery.” So the idea that the recovery is so bad because the recession was so bad doesn’t wash. Based on the historical pattern, we should be in the second year of a booming recovery by now. President Obama instead is mired in three and a half years of stagnation with worse to come.
Keynesian Economics, RIP
This catastrophic failure for America’s working people has resulted from President Obama doggedly following exactly the opposite of Reaganomics in every detail. In particular, Obama came into office with his Rip Van Winkle attitude pretending not to notice that anything has happened since 1981, and returning to the failed Keynesian economics of the 1970s with a vengeance.
As the Journal explained it this weekend, President Obama “deployed the entire arsenal of neo-Keynesian policies to lift domestic demand,” including “nearly a $1 trillion in stimulus, plus a battalion of temporary and targeted programs: cash for clunkers, cash for caulkers, tax credits for homebuyers, 99 weeks of jobless benefits, ‘clean energy’ grants, subsidies to states, and so much more.”
Keynesian economics is the doctrine that economic growth and revival is caused by increased government spending and deficits. The increased spending and deficits are supposed to increase aggregate demand for goods and services, which supposedly causes producers to produce more. If you listen to President Obama carefully, he is always saying that economic growth and prosperity comes from increased government spending.
If the idea that increased government spending and deficits create prosperity doesn’t seem to make sense, that’s because it doesn’t. Keynesian economics has never worked, not when it was born in the 1930s and not when it finally crashed and burned in the 1970s with double-digit inflation, roaring unemployment, and deep recession all at the same time. That is supposed to be impossible under Keynesian economics, because you can’t have both too little aggregate demand (the supposed cause of recession and unemployment) and too much aggregate demand (the supposed cause of inflation) at the same time.
The central fallacy behind Keynesian economics is that the money for the increased government spending and deficits has to come from somewhere. If the government borrows a trillion dollars out of the private sector to spend a trillion back into the private sector, it hasn’t done anything to increase the economy on net. If it seizes a trillion dollars in taxes out of the private sector to finance the trillion of increased spending, the result is worse. The economy has not been expanded on net, and the increased taxes reduce the incentives for production, resulting in a net loss to the economy.
Keynesian economics survives not as a matter of logic, but because it provides cover for what the politicians want to do: increase spending and deficits to buy votes for their political machines. For a Chicago machine politician like Barack Obama, that is catnip.
The Failure of President Obama
What drives economic growth and prosperity, however, is not government spending and deficits, but incentives for production. That was the insight behind Reaganomics, and the reason why it was so successful.
Lower tax rates increase the incentives for production by allowing producers to keep more of what they produce. Deregulation increases incentives for production by reducing the costs of production, increasing the resulting reward. Restrained, anti-inflation monetary policy expands the incentives for investment to increase production because investors know the value of their investment will not be depreciated by inflation and a declining dollar. Reduced government spending and deficits reduce the government drain on private-sector investment funds.
Moreover, these are not policies suited for a particular time and its policy challenges. These are timeless free-market economic policies enduring for all time. As I argue in my new book, America’s Ticking Bankruptcy Bomb, if we would only restore these planks of Reaganomics, within a year the economy would take off on a new, generation-long economic boom. As the Journal again said this weekend, “The only way out of this mess is to return to the growth policies that nurtured the boom of the 1980s.”
The disgrace of Obamanomics is that its rigid, unreconstructed Keynesian economics was discredited in both theory and practice over 30 years ago. The historic success of Reaganomics was a demonstrated fact for all the world to see (and subsequently imitate) over 20 years ago. But President Rip Van Winkle, playacting dumb, takes us back to the future of the 1970s, reflecting the devout prep-school Marxism of his youth.
A man of faith in a godless age is hitting Americans where it hurts.
Mr. and Mrs. American Spectator Reader, let P.J. O’Rourke talk sense to your kids.
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