Our President and all the Krugmans and Ezra Kleins out there refuse to face the fact that Keynesianism is dead.
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He is not the only one. Witness the spectacle of the equally self-absorbed Ezra Klein, who in his uninformed blog for the Washington Post just last month ridiculed the Republican Cut, Cap and Balance Plan for failing the test of Keynesian economics. He writes:
The only way to prevent massive layoffs, the only way to give the unemployed some help and the underpaid some relief, is for the federal government to spend. And yet we want to write into the Constitution a requirement that spending remain at 18 percent of the previous year’s GDP? That is to say, a requirement that the federal government needs to make recessions worse rather than drawing on its unique capacity to make them better? Are we mad?
Klein is blissfully unaware that there is even any dispute over Keynesian economics, let alone that it was thoroughly discredited 30 years ago, and replaced by an historical success proven over 20 years ago. Indeed, he is so behind the curve in recognizing the economic policy debate that he indicates that anyone who doesn’t genuflect to the 1930s wisdom of Keynesian economics must be “mad.” That only raises, and answers, the question of whether Klein can helpfully comment on today’s politics and public policy in America when he is not even following, let alone understanding, a central, decades-old, fundamental economic policy debate.
That is apparently not a problem for the Washington Post, which institutionally presents an open question of whether it is so behind the curve of what is happening in America today that it can even cover and report on current politics adequately for its readers. Certainly no one relying on that paper for political coverage in 2010 would have had any idea of the New Deal-sized political earthquake coming in November. That little item was first predicted in this space, by contrast, in 2009.
But arguably even worse: the New York Times, whose resident economics scholar, Paul Krugman, argues that the only thing wrong with the Keynesianism of Obamanomics is that the spending stimulus wasn’t several times bigger. He offers as his model the spending of World War II. Federal spending in 1943 was 43.6% of GDP, with the federal deficit at 30.3% of GDP. In today’s equivalent terms, that would mean a federal budget of $6.54 trillion, or over 70% higher than today, and a federal deficit of $4.55 trillion, almost 3 times higher than today.
Talk about mad. The runaway Keynesian spending spree we have already suffered has driven the nation to the edge of bankruptcy. Do we have to drive America over the bankruptcy cliff before Krugman acknowledges the proven failure of Keynesian economics? The answer is no, because his devotion to the doctrine is religious, not intellectual, and so it can’t be falsified.
Professor Richard Rumelt of the UCLA Anderson School of Management timely reviews the economics of World War II spending and other policies in the weekend Journal. He explains that it wasn’t Keynesian-increased consumption from all that World War II spending that ended the Depression, writing:
Government policy didn’t stimulate personal consumption, as Keynesian policy makers aim to do today. During World War II, there was no investment in civilian infrastructure and the government placed severe restrictions on consumption.… Thrift restored personal balance sheets, ultimately setting the stage for the postwar boom.
Rumelt adds that contrary to Keynesian economics:
During the 1941-1945 war years, over 22% of disposable income was saved. This high savings rate was driven by fiat. Thanks to wartime rationing, Americans were only allowed to purchase small amounts of sugar, butter, meat, gasoline, tires, shoes, bicycles, processed foods and other goods. Plus, there was virtually no production of new cars, radios, home appliances, or housing. In fact, when inflation and increased working hours are taken into account, consumption per hour worked actually declined for the bulk of civilians during the war. Civilian living standards stayed at Depression-era levels.
Rumelt explains that it was actually after World War II, when government spending was reduced by nearly two-thirds as a percent of GDP, and the deficit was nearly wiped out, that the economy boomed. The foundation for that boom was not the Keynesian consumption spending of the World War II years, but the increased personal savings and debt repayment of those years. So Krugman completely misinterprets the government spending effects of the war years.
The more sophisticated (I would argue sophistic) defense of the tragic failure of Obamanomics states that recoveries that follow financial panics are supposedly slower. But that has not been the experience of the American economy. Over the last 70 years, recessions in America have previously lasted only 10 months on average, with the longest previously being 16 months. Moreover, again, the deeper the downturn, the stronger the recovery. Yet, we are three and a half years beyond the last recession’s starting date, and there has been no effective recovery.
It was only the Great Depression itself, prolonged with Keynesian economics, where the human suffering dragged on for over a decade. Historically, recessions or downturns have often been accompanied by financial panics, a classic feature of the business cycle. The sophistry of this argument is just an attempt to devise a political excuse for the failure of President Obama and his outdated, benighted economic policies.
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