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Keynesian Economics, R.I.P.

Monday May 27th, 2013   •   Posted by Burt Abrams at 10:59am PDT   •  

In 2009, Keynesian economists in the Obama administration were downright giddy with excitement. The American Recovery and Reinvestment Act (ARRA) passed by congress was the “biggest peacetime fiscal stimulus in U.S. history” that promised to return the economy to full employment in short order. The Act’s $787 billion (equivalent to about 5% of our national output) in tax cuts and spending came from federal borrowings that added to our national debt, a small price to pay for pushing the economy back to full employment, or so we were told. Sufficient time has now passed to assess the impact of ARRA. The Congressional Budget Office contends the Act’s biggest effect hit in 2010 and by 2013 the Act’s effects had become negligible. The graph from the Federal Reserve Bank of St. Louis showing real output before and after ARRA tells a different story.

gdp movement

The shaded area of the graph measures the period of our Great Recession. Positive economic growth returned in the second quarter of 2009, before ARRA had a chance to impact the economy. But notice the big jump up in GDP in 2010 and subsequent drop as ARRA’s impact petered out. You don’t see it? Neither do I. In fact the graph seems to be consistent with a economic recovery following the Federal Reserve’s pushing of it’s federal funds interest rate down near zero in November, 2008. The economy continues to recover slowly, seemingly hampered by a variety of government policies and uncertainties (e.g., wasteful subsidies and expenditures, expansions to unemployment insurance and Medicaid, uncertainties about Obamacare, concerns about future tax burdens, etc.). What we don’t see is any noticeable impact of the “biggest peacetime fiscal stimulus in U.S. history.” Calls for even more Keynesian fiscal stimulus and government borrowing seems pointless at best and, at worst, downright dangerous given all we know about public indebtedness.

To help put the nail in the Keynesian coffin, I’ve taken the liberty to compose an appropriate obituary. Feel free to dispense it widely.

Obituary: Keynesian Economics, R.I.P.

Keynesian Economics, aged 77, died peacefully today after a prolonged illness and complications associated with the Great Recession. Born in the 1930’s of British parentage, it rose to preeminence as the dominant macroeconomic theory. It is survived by well-intentioned, but misguided, older economists and politicians who have difficulty facing statistical evidence and commonsense. It leaves a legacy of massive public indebtedness, unsustainable entitlement programs, and slowly growing and sometimes bankrupt economies.

In the 1960’s, its short-run orientation was embraced warmly by U.S. politicans of all persuasions. Its disregard for anything other than the short run was succinctly summed up by its motto, “In the long run, we’re all dead.” In it last years, it provided the justification for the American Recovery and Reinvestment Act of 2009 that undertook bizarre public policies that failed basic benefit-cost assessments: “Cash for Clunkers” that destoyed perfectly usable automobiles, construction of airports in the middle of nowhere (but close to congressmen’s home towns), installation of high-speed rail systems that traversed sparsely settled parts of the country, often without passengers, 5 mph faster than the trains they replaced, and subsidies to wasteful companies that eventually went bankrupt. The Act did not return the economy to full employment as promised but did boost the country’s national debt and helped to lower its credit rating.

Keynesian deficit stimulus spending made the United States, once the greatest and wealthiest country in the world, dependent on foreign lenders. The taxes needed to fund its bloated government spending and service its national debt discouraged the private sector and crowded-out private entrepreneurship. Its national debt will burden future generations and slow economic growth for years to come.

After 77 years, the long run had arrived for Keynesian Economics. Internment is in Potter’s Field.







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May 2013