Embracing the Keynesian myth: government is our savior

One of my liberal friends from the wet side sent me an email this week pointing out the hypocrisy of some of the Republican legislators in Wisconsin. Seems there are a number of them that are receiving farm subsidies. And according to my friend farm subsidies are just “welfare for the wealthy.” The implication is that no one with their head in the public trough can address the problems of government. Well, if that is true we are all doomed. Our country cannot be saved. We might as well spend ourselves into oblivion and just file bankruptcy when it all comes crashing down.

So I sent my friend an email response: “Since everybody has their head in the public trough we should just not do anything but raise taxes and keep filling up the trough with borrowed money. Somehow, I just don’t see the wisdom in that. I am willing to put farm subsidies on the chopping block along with a lot of other tax preferences. The problem becomes whose golden goose gets slaughtered here. I think it is better that we all face the reality and roll back programs across the board. Cut wages and find a way to balance the budget that is equally unfair to everybody. Then once we get the budget back in balance we can have more arguments about what isn’t working and why it should be eliminated.

My friend responded with a lengthy dissertation on Keynesian economics and why Keynes economic policies of increased government spending were the answer to our economic woes. John Maynard Keynes was a depression era economist who was the darling of liberal causes like the New Deal. Problem is many economists believe Keynes’ economics extended the depression. His theories were further discredited during the 1970’s when inflation and unemployment – that famous “misery index” were out of control. Something that Keynesian economics claimed was not possible.

In short, Keynesian economics claims that recessions are caused by a lack of demand. In the economic world of Keynes the economy is driven by consumer spending. When spending declines and the economy withers it is the government’s job to spur demand by flooding the economy with government spending. My west side friend holds that the current problem is the government hasn’t stimulated the economy enough.

Milton Friedman and others have criticized Keynes for his flawed economics. The basic problem with Keynes theory of increasing spending to pull us out of a recession is that it ignores the reality that government cannot produce wealth. The only way government can increase its spending is by increasing taxes – in other words take the money out of the private economy; or, by borrowing. Borrowing can either come from the private economy – taking more money out of the local economy – or from other countries. Keynes is popular with liberal politicians because his theory says they can fix the economy by simply spending more money. It would be truly great if it were true.

My friend then criticizes President Bush for spending too much money and creating the recession. Bush fought two wars and expanded Medicare while cutting taxes. My liberal friend says Bush should have increased taxes to pay for his spending programs. Don’t get me wrong here. I’m no fan of Bush’s big government spending programs, but apparently Keynesian economics only works for Democrats.

If Keynes was right where do the happy times end? Why should we ever be concerned about deficits? The problem is that the government spending has to increase at ever-higher levels until it is no longer sustainable. At some point the underlying economy can no longer generate enough to pay the debt holders and they will be unwilling to lend the government money.

The truth is that the government cannot control the economy. Yes it can sometimes spur economic expansion but government cannot produce wealth. In fact government is more often involved in sustaining and nurturing obsolete business models. Consider Amtrak as just one example. It continues to lose money, is notoriously late and without government support would have died some time ago.

The cash for clunkers program is another example of failed Keynesian economics. Give consumers an incentive to spend now and it will jumpstart the economy. During the program a lot of cars were sold, but as soon as it ended demand fell. In other words, it simply accelerated consumer demand on a short-term basis. There was no lasting stimulus to the economy.

Keynes’s economic theories are significantly responsible for getting us into this mess. It’s time to dump him on the ash heap of history and move on. What we need to turn our economy around is sustained growth in jobs in the private sector. Those jobs will only come when government starts to get out of the way and unleashes the power of our capitalist system. We could make a significant start by developing our own energy reserves.