October 29, 2011

Meltzer at WSJ on Keynesianism’s Failure

Filed under: Economy,Taxes & Government — Tom @ 8:06 am

It has failed. Anyone arguing its success is in a delusion so deep they may be beyond help.

Allan Meltzer, in a Friday Wall Street Jounral op-ed, identifies the four reasons why the Pelosi-Obama-Reid Economy’s version of Keynesianism has failed so spectacularly, and so obviously (bolds are mine):

Those who heaped high praise on Keynesian policies have grown silent as government spending has failed to bring an economic recovery. Except for a few diehards who want still more government spending, and those who make the unverifiable claim that the economy would have collapsed without it, most now recognize that more than a trillion dollars of spending by the Bush and Obama administrations has left the economy in a slump and unemployment hovering above 9%.

Why is the economic response to increased government spending so different from the response predicted by Keynesian models? What is missing from the models that makes their forecasts so inaccurate? Those should be the questions asked by both proponents and opponents of more government spending. Allow me to suggest four major omissions from Keynesian models:

First, big increases in spending and government deficits raise the prospect of future tax increases. Many people understand that increased spending must be paid for sooner or later. Meanwhile, President Obama makes certain that many more will reach that conclusion by continuing to demand permanent tax increases. His demands are a deterrent for those who do most of the saving and investing. Concern over future tax rates is one of the main reasons for heightened uncertainty and reduced confidence. Potential investors hold cash and wait. …

Second, most of the government spending programs redistribute income from workers to the unemployed. This, Keynesians argue, increases the welfare of many hurt by the recession. What their models ignore, however, is the reduced productivity that follows a shift of resources toward redistribution and away from productive investment. …

Third, Keynesian models totally ignore the negative effects of the stream of costly new regulations that pour out of the Obama bureaucracy. Who can guess the size of the cost increases required by these programs? ObamaCare is not the only source of this uncertainty, though it makes a large contribution. We also have an excessively eager group of environmental regulators, protectors of labor unions, and financial regulators. Their decisions raise future costs and increase uncertainty.

Fourth, U.S. fiscal and monetary policies are mainly directed at getting a near-term result. The estimated cost of new jobs in President Obama’s latest jobs bill is at least $200,000 per job, based on administration estimates of the number of jobs and their cost.

Also, to a very real but tough-to-measure extent, such “stimulus” pumps up reported economic growth by unsustainably increasing consumption expenditures, which only indirectly measure after the fact what Gross Domestic Product really is, which is the value of what is produced, not consumed. Especially if seen as short-term, they do very little to promote permanent job growth and productivity-enhancing investment. This largely explains why we are where we are, which is in a funk not seen since the Great Depression, which not coincidentally is the last time extreme Keynesianism ran rampant.


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