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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.
(Page 2 of 2)
Time out for a historical digression. One can’t listen to the left these days order up more and more deficit spending without harkening back to the early 1980s, when Ronald Reagan rescued the U.S. from the greatest financial collapse since the Depression. In the 1970 and early 1980s, the stock market in real terms lost almost 70 percent of its value. Reagan slammed the brakes on money and cut tax rates. The deficits of that era averaged about 5 percent of GDP. Back then many leading Keynesians, including Samuelson, first swore this would never tame inflation and restore growth, then by 1984, when the economy grew at 7 and even 8 percent, they shrugged and posited: this was simply a classic Keynesian recovery. The deficits caused the growth. Never mind that other nations that ran even bigger deficits didn’t grow. And back then, hypocritical liberals trashed Reagan for running deficits they now trumpet as virtuous. One of the few exceptions was Robert Eisner of Northwestern, who applauded Reagan’s deficits. He was one of the few honest Keynesians of his day.
BUT HERE’S THE POINT: if Reagan’s deficits caused a 7 percent growth rebound with deficits of 5 percent of GDP, why have Obama’s deficits, which are twice as large, generated only 1 to 2 percent growth?
The answer is that Reagan’s supply-side, tax rate-cut policies, not the deficits, stimulated production and investment, not demand. In nominal terms, demand grew very little in the mid-1980s. You can’t have a demand-side Keynesian expansion with falling prices; it’s impossible within that model.
The fundamental flaw in the theory of government as pump primer
is that the public sector can
only get a dollar to spend in the first place by parasitically
taking it from the more productive private sector, which is why the
mythical “multiplier effect” of government spending — the increase
in total GDP for each dollar spent by the government — is less
than one. Robert Barro of Harvard has found exactly that in
his empirical studies on stimulus spending. He found that
government spending often crowds out private spending, rather than
stimulating it.
But now, in the 21st century, Keynesianism has run into a new and formidable impediment to its deficit theories: global bond vigilantes. They are telling nations that debt-financed stimulus spending has run its course. Interest rates have soared in many eurozone nations like Greece and Ireland. Yet the U.S. is attracting so many bond buyers that interest rates are at 30-year lows. How long can this bubble inflate? Meanwhile, Fed Chairman Bernanke’s zero interest rate and asset purchasing schemes have driven gold to $1,800 plus an ounce, as investors lose trust in paper currencies. Will it take a 2008 style financial panic to get Washington to understand that the free-lunch era is over?
Perhaps the biggest lie from the Keynesians is the premise that — with so many Americans unemployed — we should delay cuts in spending during this soft patch in the economy and lock in long-term cuts in entitlements in future years, when the economy is growing. This is the Obama pitch. But when have Democrats (or even Republicans for that matter) ever in any of our lifetimes said, “Now is the time to cut spending”? Nancy Pelosi has sprinted to the microphone after every negotiation with Republicans pledging that there would be no cuts in Social Security, Medicare, and Medicaid—not now, not next year, not ever. These are the programs that nearly everyone acknowledges are driving the red ink tsunami, with budgets that are expected to climb to $2.4 trillion from $1.6 trillion this year, and yet they are labeled untouchable by the fiscal doves.
Republicans would be fools to fall for the “spend now, save later” gambit. This is the attitude of a teenage girl roaming the mall with daddy’s credit card. It is a promise never to cut spending. That’s because Keynesianism isn’t a real scientific economic theory. As economist Don Boudreaux of George Mason University puts it: “When you get right down to it, Keynesianism is just a convenient excuse for what the left wants to do anyway: spend more government money.” It has left us with a $14.5 trillion national debt and an economy flat on its back.
Now Obama and the rest of Keynesian cult say that if we can just spend and borrow more, the economy will get better and the jobs will come back. If there’s any good news from the events of the last three years it’s that Dick Durbin may be right: almost no sane person really believes that anymore.
About the Author
Stephen Moore is a member of the Wall Street Journal editorial board.
Letter to the Editor View all comments (30) | Leave a comment
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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