The Keynesian 'Solution'

Dictionary.com describes John Maynard Keynes as follows:

1883–1946, English economist and writer.

British economist who proposed that high unemployment, being a result of insufficient consumer spending, could be relieved by government-sponsored programs. He also advocated deficit spending by governments to stimulate ecomomic activity.

English economist who advocated the use of government monetary and fiscal policy to maintain full employment without inflation

Keynesian economics has dominated the American political economy for decades, going back at least to the great depression. It was Keynesian policy which FDR used to get us out (cough, gag) of the depression. In the late 1960s early 1970s Richard Nixon (who had taken us off the gold standard completely) stated “We’re all Keynesian now.”

Virtually every president since at least FDR has been to some extent or the other, Keynesian, no matter what else you may say about him. That even includes Reagan, though possibly to a lesser extent.

As can be seen from the above definitions, one of the main, perhaps THE main tenant of Keynesian economics is that during times of economic slowdown, the government should spend money on infrastructure and various projects in order to provide jobs, spur consumer spending, etc. This, supposedly will get the economy through the tough times. Once the economy recovers, the government spending can be curtailed. It is a form of planned economy.

Sounds good on paper to the layman, but there are more than a few drawbacks.

To start with, it really does not work. As I have said elsewhere, the state of the economy was at least as bad, if not worse in the late 1930s, after years of FDR, than it was when FDR took over. FDRs programs were, among many other things, Keynesian.

It is not a natural thing for the whole economy to be in a downturn all at the same time. Unfortunately, most people think that the free market will frequently result in a total economic meltdown, at which point some government intervention (in the form, at least, of Keynesian policies, if not outright socialism) is required. However, while no possible economic system can ever insulate every individual from hardship, the free market will never end up in an economic meltdown. The meltdowns that do occur (such as 1929 onward and our current situation) are almost always directly related to government intervention. However, the solution proposed by our government leaders? More government intervention. Make sense to you??? Yeah, me neither.

1929 was the result of government intervention. The as bad or worse situation of 1938 was due to continued government intervention.

Second, it is as close to an absolute fact as anything in the world that once government spending is started, it is not stopped. Many of the programs for economic recovery of the 1930s are still with us today. This causes continued deficits and other problems which result in further economy wide problems on down the road.

Third, and most importantly, there are long term negative effects of this type of spending (deficits and higher taxes and the further economic hardships that occur due to these things). When asked about what the effects of his policy would be in the long run, Keynes himself famously quipped, “In the long run, we’re all dead.” There ya go. That’s the philosophy we want to hand down to our kids, right? We want policy which we believe (rightly or wrongly) will benefit us, but who gives a rip what it will do to our descendents? Sure, count me in. I don’t care what Jr. says.

Now, what to do about our current mess? First off, let us be clear. Our problems are not the result of the free market gone wild. Our problems are directly related to over arching government intervention into the lives and businesses of individuals and corporations, from bad, even terrible tax policy, from wretched spending programs, from freedom squelching regulations, from currency devaluing monetary policy, and on and on. The proposed solution? More government. Create money out of thin air and spend it on ‘infrastructure,’ and a myriad of other social programs. In short, the current proposed solutions are the same old tired Keynesian policies which have actually contributed to the current mess.

In the end, I have no idea exactly how all this will turn out. But I can promise you, absent any major change, the direction we are heading is wrong. We can keep putting band-aids on our severed jugulars and keep the patient alive until hopefully, in the long run, we are all dead, OR we can care about our descendents and try to fix the problems permanently with sound, honest money, low taxes, limited government, and so forth.

What do you think?