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The Nation's Pulse
Is Keynes Finally Dead?
One would think so — yet under this presidency he will never be allowed to rest in peace.
In the immediate aftermath of the debt ceiling deal in August, liberal Democrats on Capitol Hill felt as though they had been flattened by the Tea Party express. The plan promised $2.1 trillion in budget cuts over the next decade. For conservatives, that was not a huge amount of savings out of $44 trillion in anticipated federal spending. But the left was apoplectic about even a haircut for government programs. Senator Richard Durbin, the Illinois Democrat, fumed that the agreement and its $21 billion of savings in 2011 might as well be “the final interment of John Maynard Keynes.” He continued glumly: “Keynes died in 1946 but it appears we are [now] going to put him to his final rest.”
Now that’s a pleasant thought. Keynes was, of course, the influential Depression-era British economist who advised politicians to ramp up government spending, borrowing, and printing of money during an economic downturn in order to prop up demand for goods and services and thus return to prosperous times. Borrow now, from future generations, and let the kids worry about it, because, as he famously said, “in the long run, we are all dead.” That philosophy has been the guiding doctrine of liberalism for at least 75 years. So triumphantly has this doctrine penetrated academia and politics that President Richard Nixon famously declared, “We are all Keynesians now.”
The leader of this new branch of economics was, for a long time, the late and highly influential Keynesian disciple Paul Samuelson. He was to Keynesianism what Paul was to the spreading of Christianity. Mr. Samuelson’s tour de force was his best-selling textbook, Economics: An Introductory Analysis. Written in the late 1940s, and with more than 4 million in sales, the book has indoctrinated three generations of students with its illogic.
Samuelson was enamored with the power and wisdom of the political class to tinker with the economy to make it function like a well-oiled machine. He was godfather of the idea of pumppriming an underperforming economy with more federal spending and more money. He believed so powerfully in the efficacy of government tinkering that, in the Cold War years, he routinely warned that the Soviet economy would catch up to the U.S. In the 1989 edition of his textbook, he wrote: “The Soviet economy is proof that, contrary to what many skeptics had earlier believed, a socialist command economy can function and even thrive.” A year later the Soviet economy imploded and the Berlin Wall came down. One would think that would have been pretty much the end of the line for America’s first Nobel-prize winning economist. Since then at least a dozen of Samuelson’s disciples have won the prize.
Keynesianism is based on the flawed idea that the economic problem underlying recessions is insufficient consumer demand for goods and services, and that by goosing demand with free money the government can increase output and employment. As Doug Holtz-Eakin, former director of the Congressional Budget Office, explains, “The idea behind Obamanomics and Keynesianism is that the government can trick people into spending more money than they would otherwise.” It turns out people aren’t that gullible.
Seldom has an economic theory been so thoroughly rebutted by real world events. After eight years of the first grand Keynesian experiment — the New Deal during the Great Depression — the unemployment rate in 1939 was 20.7 percent and output was still growing at a crawl, seven years after Franklin Delano Roosevelt took office. That’s some victory. As Burton Fulsom, author of the Depression history New Deal or Raw Deal, has argued: “The greatest myth of the twentieth century is that Franklin Roosevelt’s New Deal ended the Great Depression.”
Japan has employed textbook Keynesianism for 20 years and nearly the whole island has been paved over by public works projects, yet the economy continues to flounder and asset values are still only half what they were in 1990.
BUT THE MOST EMBARRASSING repudiation of Keynes has been the Great Recession of 2008– 2011. Never in modern times has the premise that open-checkbook government spending and pedal- to-the-metal money creation lead to economic growth been put to such a large-scale trial. The results have been completely the opposite of what was predicted.
The key to the magic of Keynesianism is to boost growth in demand by running economically expansionary deficits. In 2008 President George W. Bush doubled the deficit by enacting a $100 billion Keynesian tax rebate. Then, in 2009 we ran a $1.4 trillion deficit, thanks in large part to President Obama’s $830 billion stimulus plan. This was double any other deficit, in real dollars, in peacetime history and by far the largest as a share of GDP (at 10 percent) in peacetime history.
In 2010 we ran another $1.3 trillion deficit, followed by $1.3 trillion more this year. So that’s $4.0 trillion of debt, which has produced — drum roll, please — 9.1 percent unemployment and GDP growth of less than 1.0 percent — barely an economic pulse. Every major economic forecaster has downgraded their predicted growth rate for 2012, and there’s now more panicked talk of a double-dip recession.
The Keynesians’ retort is what it always is when their ideas are shown to fail: we haven’t had enough stimulus for long enough. The White House is now arguing that Neanderthal Republican tea partiers turned off the spending and borrowing spigot way too soon. Christina Romer, the first chief economic adviser to Mr. Obama, regrets that “we only got one shot” at stimulus and her prescription is “more.”
This was the excuse for why Keynesianism failed to reverse the Great Depression. Those short-sighted Republicans in 1937 allegedly turned off the debt machine, insisted on balancing the budget, and once the medicine was shut off, the economy tanked again. But there was no prosperity in the 1930s at any time after FDR doubled federal spending and government debt as a share of GDP. Unemployment never fell below 10 percent until millions of young people donned uniforms and the nation mobilized for World War II.
In any case, where is the evidence that Keynesian fiscal stimulus has been put on hold this year? There is none. The 2012 deficit is going to be roughly 10 percent of GDP, which, five years ago, would have been considered an unthinkable level of pump-priming. Federal spending is up $140 billion this year, and that is layered on top of the massive stimulus of 2009 and 2010. The latest GDP numbers show that federal government spending was one of the few areas where the economy expanded in the first half of this year— even as much of the private economy flat-lined. And many have forgotten that we got a further dose of stimulus that was guaranteed to produce jobs back in December when Mr. Obama won a one-year payroll tax cut with a price tag of $112 billion. That has corresponded with a rise, not a fall, in the unemployment rate, yet the White House wants to extend it for another year.
In other words, the current Keynesian argument is that $100 billion of stimulus a month isn’t enough. That we need, what? Another $150 or $200 billion a month in deficits to make the economy grow? And if that $2 trillion isn’t enough, then what?
Maybe QE3 from Ben Bernanke and the Fed. Those who say “more stimulus, please” forget that the Federal Reserve has run the most expansionary money creation strategy in history, first through near-zero interest rates, and next through asset purchases, known as QE1 ($1.2 trillion in mostly mortgage-backed securities purchased by the Fed in 2009), followed by QE2. QE2 started late last year and pumped $600 billion into the economy through the purchase of U.S. Treasury securities. But that latest debt and money pump-priming has corresponded with this year’s economic slowdown. And the resulting higher prices in gasoline and food have made Americans feel poorer not richer, thus dampening consumer demand. Oops.
About the Author
Stephen Moore is a member of the Wall Street Journal editorial board.
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Hal G. P. Colebatch| 10.6.11 @ 6:20AM
What neo-Keyneseans never mention is that at the end of his life Kerynes himself repudiated Keyneseanism and conceded that classical economists had been right all along.
DRed| 10.6.11 @ 8:40AM
Remind me again when that was?
Hal G. P. Colebatch| 10.6.11 @ 2:03PM
In an article “The Balance of Payments of the United States” in the Economic Journal in 1946:
"I find myself moved, not for the first time, to remind contemporary economists that the classical teaching embodied some permanent truths of great significance, which we are liable to-day to overlook because we associate them with other doctrines which we cannot now accept without much qualification. There are in these matters deep undercurrents at work, natural forces, one can call them, or even the invisible hand, which are operating towards equilibrium. If it were not so, we could not have got on even so well as we have for many decades past."
DRed| 10.6.11 @ 2:34PM
That, in no way, says what you think it does.
Nick| 10.6.11 @ 5:18PM
DRed,
Despite what you may call yourself at ComiCon, you are not Obi-Wan Kenobi, and you cannot perform Jedi mind-tricks.
"These aren't the droids you're looking for."
Keynes saw the disastrous fruits of his theories played out during the Great Depression by the Polio Prince, FDR. Unlike most liberals, Keynes could see the data and accept that his ideas did not work, here, in the real world.
DRed| 10.6.11 @ 6:55PM
ComiCon? Oh Nick, you wound me. That was a low blow.
emo| 10.9.11 @ 9:09PM
Certainly Keynes would have disagreed with the Neo-Keyniesians who want to raise taxes in the midst of a recession
david c| 10.6.11 @ 10:39AM
Stephen, great article.
What all these booms and busts have in common is demographics. Look at Japan and now our baby boomers. When a massive wave of people in their 30’s, 40’s and 50’s moves through an economy we have massive demand for houses, cars, education and vacations. When these folks enter their 60’s, 70’s and 80’s they do not need to consume at their peak pace and demand falls off a cliff.
Demand can be increased on the margin by deficit spending but the real force behind demand is demographics. We are entering a depression that will last 10-15 years. Massive deficits to cover health care and other entitlements are a certainty.
Money can be printed to cover the entitlement deficits and other shortfalls, devaluing the currency. We have no other choice.
Keynes is dead. Keynes theory is also dead. The next 10-15 years cannot be understood using his model.
Shamus| 10.6.11 @ 6:32AM
In the long run Keynes will be dead.
John Navratil| 10.6.11 @ 8:35AM
Ah, but his spirit lives on... and on... and on...
Dick Nome| 10.6.11 @ 6:39AM
Keynesian economics is integral to the Oborg collective Marxist / Socialist agenda. They can deny none of it as it is who they are. They must be defeated and replaced.
Pecos Pete| 10.6.11 @ 6:57AM
King O will depart the government in early 2013 leaving the rest of us, and our heirs, facing hyper inflation to pay off his debts.
Timothy L. Pennell| 10.6.11 @ 6:57AM
Is Keynes Finally Dead?
As long as one Liberal lives, Keynes will never die.
Is Castro dead? Is his Island Worker's Paradise, still alive, in the minds of the Far Left, and the not so far Left? Do they not have the Finest Health Care System in the world? Let's ask HUGO.
Christina Romer, Goolsbee, and all the other Rats who jumped off the SS OBAMA, don't live THEIR lives, this way. Nobody does. It's called: Digging a hole. And, you can't get out of a Hole, by digging it deeper. I mean, is that any way to run an Airline? Maybe we should ask them, while they're still around?
DOGMA is like an Addiction. It's like Crack, or Meth. You can't just stop. Keynesian Economics is part of the Religion of the Left. Keynes is a Prophet. As is Darwin. Marx. Machiavelli. Lucifer. They can no more turn their backs on them, than could You, or I, turn our backs on our Faith. And, because it is FAITH, they don't require any PROOF.
And when the Proof, inevitably, does come (as it always does) they hold fast to their belief that you can stand in a Bucket, and lift yourself off the ground, by pulling on the handle.
And, when the bucket doesn't lift?
Why, they pull harder, of course.
And, when the Massive Borrowing and Spending doesn't work?
Mac Jehof| 10.6.11 @ 9:32AM
Right,ask Hugo if you can find his hospital. Is Chavez still sucking air?
John Navratil| 10.6.11 @ 8:40AM
Timothy L. Pennell,
"As long as one Liberal lives, Keynes will never die."
Precisely. The liberal lives by the power of the purse. Any problem requires spending. The war on poverty requires spending. Then education... more spending. Economy is slow? Spend more. The only spending cut the liberal likes in defense - the only constitutional obligation of the bunch.
Is it any surprise that the solution to overspending is more spending?
USSAlabama| 10.6.11 @ 8:48AM
And think why . . . as students every problem's solution was to get money from mom and dad.
As professional students they still got it from mom and dad and the government.
Spending is all they know. There are no innovative actions they can conceive because it is just not in the repertoire.
It comes down to the fact that that is all they know, not that they have any sound reasoning for living by the power of the purse.
VonMisesJr| 10.6.11 @ 9:07AM
Keynes did not advocate raising taxes in a recession. But Progressive elitist know that most people do not understand Classical or Austrian economics that actually makes good sense, no less the perverted bastardization of economics known as the Keynesian School.
Stagflation proved Keynes wrong in the late 1970's, when we had high inflation and high unemployment. Demand-Side Economics says that when demand is high, you get inflation. And when itis low, you get unemployment. So by definition, stagflation cannot occur if Keynes was correct. Perhaps another topic the great Steve Moore can expound upon in another column.
John Navratil| 10.6.11 @ 9:19AM
VonMisesJr,
Perhaps not, but where was he going to get the money to put into the bottles to bury?
John Navratil| 10.6.11 @ 9:38AM
VonMisesJr,
I had a Econ. prof who emigrated from Poland after WWII (Marian Kryzanyak (sp?) was his name). He was fabulous and, given his upbringing, was not too fond of the left or Keynesian economics.
He too taught that the Chicago school had no particular problem with running a deficit during a recession as long as the deficit was repaid. My previous post was, perhaps, a bit too flippant, but Keynes view of the source of money was deeply flawed, in my opinion.
JayDick| 10.6.11 @ 12:18PM
To compound the problem, politicians have learned that they can often get elected by promising so solve problems, even if they have to invent the problems. Of course, that usually involves spending and the whole effort, spending and all, seldom does any good and frequently does harm. The American electorate continues to buy this hogwash. We need to educate the electorate so that they will find attractive a candidate for political office whose platform is: I will undo all the silly government programs that are screwing up or economy and our society.
Mastermind| 10.7.11 @ 12:36AM
That candidate exists and his name is Ron Paul.
Richard| 10.6.11 @ 2:21PM
Leftists live for government spending since they are the ones in charge. They reward friends, build constituencies, punish the enemy, and most important of all build their power at the expense of the hated middle class. "keynesianism" is just a theory they can use to justify their ideology.
Marc Jeric| 10.6.11 @ 2:29PM
THERE ARE CURABLE AND INCURABLE ADDICTIONS. The curable ones are: alcoholism, cocaine, heroin, and similar; the one incurable addiction is the money printing press. Soon the ugly inflation will join the unemployment rate.
mzk1| 10.6.11 @ 6:58PM
When I started college (1977), Samuelson's Economics was basically the only textbook used, to the point that the professor used it as an example of inelastic supply and demand.
To be fair, if you leave out the Keynsian stuff, he has a nice explanation of supply of demand curves, which of course is basically what the Laffer curve is - in other words, common sense. Not to mention showing that sales taxes are paid for by a combination of higher prices and lowered supply - i.e., unemployment.
And at least he mostly avioded Marx. Keynes was an economist, which is more than you can say for Marx.
Howard| 10.6.11 @ 9:37PM
I was an economics major way back when. The faculty were all Keynesians. I do remember that there should be balanced budgets or surpluses during good times to absorb the previous deficits. This of course never happens.
One thing that leftists do not quote from Keynes was his belief that markets unleash "animal spirits". Obama, Pelosi and the ilk do exactly the opposite; they repress the business desire due to their creation of fear and uncertainty.
POST American| 10.6.11 @ 11:11PM
"Understand, there's NO reason ANY
nation on earth should be borrowing money
---from anyone, least of all the U.S.A.
This is ALLLLLL a con-job."
-ALAN WATT
(essential online coverage)
USURY remains what it is --an ABOMINATION.
SO, keep a goin' kiddies ---Keep a goin'
-----------FUKISHIMA n' broken eggs
----------------Just keep a goin'...
Mastermind| 10.7.11 @ 12:38AM
Ron Paul is the only candidate who will actually reverse this mess of an economy we are in with his 1 TRILLION spending cut plan. Thank God someone has the courage to stand up for principle over special interests.
emo| 10.9.11 @ 9:11PM
Keynes will never doe no matter how many times his theories are discredited (By my count Keynes has been doscredited three times, 1930s, 1970s and 2010s).
Keynes allows the political elites to rearrage the serfs lives. This is why it will never die. Too many political careers depend on Keynes' survival