The Keynesian Error

The Pittsburgh Post-Gazette recently published an excellent opinion piece by George Mason University economist Donald J. Boudreaux.

Boudreaux, a free-market guy, blasts Keynesian economics and says following its policy prescriptions has prevented the economy from recovering.

Keynesian economics is a beautiful theory based on total spending (i.e. demand- the combination of consumer and investment spending) in the economy. Recessions occur when demand declines. Keynesians believe government should step into the market (boosting demand) whenever the economy is in trouble.

Politicians have embraced Keynesianism since the publication of The General Theory of EmploymentInterest and Money in 1936. Henceforth, they used fiscal policy to inject tax-payer dollars into the economy. This money was spent building infrastructure projects and putting people back to work during hard times. These actions showed voters the politicians were attentive to and responsive during a weak economy.

There is just one little problem: Keynesianism is not the way to jump-start an ailing economy. It is certainly not a long-term solution. As soon as the government investment runs out, the “jobs” it has “created” disappear. Private demand must pick up in the interim; otherwise, as Keynes noted, “we’re all dead.”

Keynesians believe private demand alone is insufficient to keep the economy growing and unemployment under control. Government must intervene and save us from the perils of the boom and bust business cycle.

America has accepted a mixed economy since the New Deal. Certainly most champion free enterprise, but a majority also want government to step in and correct the excesses of the market.

This was certainly the case following the 2008 financial meltdown. Uncertainty helped Barack Obama win the White House (he was trailing in the polls on the day the markets tanked) that November. Since assuming office, Obama has pursued the same Keynesian fiscal policies that Franklin D. Roosevelt followed in the 1930s.

History is repeating itself. A sustained recovery has eluded us. Boudreaux describes a scene from the 1930s that is all too familiar to the one we are living in today:

the “regime uncertainty”…[is] a pervasive uncertainty among investors about the security of their property rights in their capital and its prospective returns” — unleashed by actual and threatened New Deal interventions made private innovation and entrepreneurial effort simply too unattractive. So private investment spending largely ground to a halt during FDR’s reign.

The “Great” was thus put into the Great Depression.

Roosevelt Treasury Secretary Henry Morgenthau remarked in 1939: “We have tried spending money. We are spending more than we have ever spent before and it does not work.” That was true then and it is true now.

The Obama stimulus is a case in point: It helped the economy get out of recession, but the economy has sputtered along in the two years since “recovery” began. The country is on the verge of slipping back into recession now that all the stimulus funds have been spent.

The president’s recent jobs plan-financed by taxing “the rich”- is more of the same. Mr. Obama is following the traditional Keynesian formula.

Keynes once said: “Ideas shape the course of history.” Unfortunately we are following his.


Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: