June 26, 2010

WSJ: ‘The Keynesian Dead-End’

Filed under: Economy,Taxes & Government — Tom @ 7:59 am

In the wake of yet another mediocre, downwardly-revised GDP report and a G-20 summit where the President of the United States is virtually alone in holding out for more recklessness, the Journal reacts as yours truly reacted (“Stimulus Officially and Abruptly Runs Out of Steam”) to the awful housing market news earlier in the week (bolds are mine):

The Keynesian Dead End
Spending our way to prosperity is going out of style.

For going on three years, the developed world’s economic policy has been dominated by the revival of the old idea that vast amounts of public spending could prevent deflation, cure a recession, and ignite a new era of government-led prosperity. It hasn’t turned out that way.

… The larger lesson here is about policy. The original sin—and it was nearly global—was to revive the Keynesian economic model that had last cracked up in the 1970s, while forgetting the lessons of the long prosperity from 1982 through 2007. The Reagan and Clinton-Gingrich booms were fostered by a policy environment for most of that era of lower taxes, spending restraint and sound money. The spending restraint began to end in the late 1990s, sound money vanished earlier this decade, and now Democrats are promising a series of enormous tax increases.

President Obama’s tragic mistake was to blow out the U.S. federal balance sheet on spending that has produced little bang for the buck. The fantastical Keynesian notion (the “multiplier”) that $1 of spending produces $1.50 in growth was long ago demolished by Harvard’s Robert Barro, among others. That $1 in spending has to come from somewhere, which means in taxes or borrowing from productive parts of the private economy. Given that so much of the U.S. stimulus went for transfer payments such as Medicaid and unemployment insurance, the “multiplier” has almost certainly been negative.

With the economy in recession in 2008 and 2009, we argued that some stimulus was justified and an increase in the deficit was understandable and inevitable. However, we also argued that permanent tax cuts aimed at marginal individual and corporate tax rates would have done far more to revive animal spirits, and in our view would have led to a far more robust recovery.

What the world has now reached instead is a Keynesian dead end. We are told to let Congress continue to spend and borrow until the precise moment when Mr. Summers and Mark Zandi and the other architects of our current policy say it is time to raise taxes to reduce the huge deficits and debt that their spending has produced. Meanwhile, individuals and businesses are supposed to be unaffected by the prospect of future tax increases, higher interest rates, and more government control over nearly every area of the economy. Even the CEOs of the Business Roundtable now see the damage this is doing.

Read the whole thing.

Reaxes to the bolded items:

  • The Journal left one name out of this passage who should be there: then-Ohio Congressman John Kasich. The Associated Press, in a too-rare example of historically accurate reporting in June of last year (original BizzyBlog post; saved AP article), noted that Ohio’s current GOP gubernatorial candidate “was the chairman of the U.S. House of Representatives’ Budget Committee in 1997 that balanced the nation’s budget for the first time in more than 30 years.” More than any other person, Kasich was responsible for the relative spending restraint in the 1998 and 1999 fiscal-year budgets that led to the actual and projected budget surpluses of the period. The restraint started its disappearing act after Kasich left Congress, and his claim that free-spenders on both sides of the political aisle quietly celebrated his departure is sadly true.
  • Unfortunately, I don’t agree that Obama’s and Congress’s decision to “blow out the U.S. federal balance sheet” was a “tragic mistake.” Given false intellectual cover by the likes of Larry Summers and Christine Romer, the administration and Congress gleefully did so. Perhaps Obama, Pelosi, and Reid are still deluded, as are Summers and Romer, about the awful historical record of doctrinaire Keynesianism. If they’re not, the only alternative is to assert that they have inflicted their damage deliberately.
  • Incredibly, no one except GOP candidate Rudy Giuliani was advocating further tax cuts. Democrats and their presidential candidates, most notably Obama, advocated vast tax increases; GOP candidates McCain and Romney were satisfied advocating making the current tax structure which had been in place since 2003 permanent. That wasn’t good enough, guys.
  • The FUDGE economy (Fear, Uncertainty, Doubt, and Government Excess) continues. The Business Roundtable’s tardy arrival to the corps of the concerned is no accident. The too-numerous band of crony capitalists in this group thought they would disproportionately benefit from a Washington-driven spending spree, and are late in recognizing that this administration’s hostility to the private sector was far more than election campaign posturing.


  1. Hindsight being 20/20 (liberal) Rudi was a far superior candidate than McCain, but for the bonehead move of his primary campaign to skip states to the run up to Super Tuesday. But then having Obama win now and screw up so badly may have been necessary to eradicate creeping socialism, that’s if we economically survive this and the Moderates and Independents are scared enough to reality to stop believing the sales pitch of liberals.

    Comment by dscott — June 26, 2010 @ 9:35 am

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