Sep 15 2009
Keynesianism Is The Wrong Model To Make Investment and Economic Decisions
Wall Street Journal – From the beginning, our representatives in Washington have approached this economic downturn with old-fashioned, Keynesian economics. Keynesianism- named after the British economist John Maynard Keynes — is the theory that you fight an economic downturn by pumping money into the economy to “encourage demand” and “create jobs.” The result of our recent Keynesian stimulus bills? The longest recession since World War II — 21 months and counting — with no clear end in sight. Borrowing close to a trillion dollars out of the private economy to increase government spending by close to a trillion dollars does nothing to increase incentives for investment and entrepreneurship.
The fallacies of Keynesian economics were exposed decades ago by Friedrich Hayek and Milton Friedman. Keynesian thinking was then discredited in practice in the 1970s, when the Keynesians could neither explain nor cure the double-digit inflation, interest rates, and unemployment that resulted from their policies. Ronald Reagan’s decision to dump Keynesianism in favor of supply-side policies — which emphasize incentives for investment — produced a 25-year economic boom. That boom ended as the Bush administration abandoned every component of Reaganomics one by one, culminating in Treasury Secretary Henry Paulson’s throwback Keynesian stimulus in early 2008.
Mr. Obama showed up in early 2009 with the dismissive certitude that none of this history ever happened, and suddenly national economic policy was back in the 1930s. Instead of the change voters thought they were getting, Mr. Obama quintupled down on Mr. Bush’s 2008 Keynesianism.
Producing long-term economic growth will require a fundamental change in economic policies – lower, not higher, tax rates; reliable, low-cost energy supplies, not higher energy costs through cap and trade; and not unreliable alternative energy surviving only on costly taxpayer subsidies.
Unfortunately, Mr. Obama seems to be wedded to his political talking points, and his ideological blinders seem to be permanently affixed. So don’t expect any policy changes. Expect an eventual return to 1970s-style economic results instead.
One Final Point: Consider this line from Keynes’ 1919 book THE ECONOMIC CONSEQUENCES OF THE PEACE: “[The Soviet Union's] Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.”
