The Christmas season is an appropriate time to reflect on Keynesian economics, given this: believing in Keynesian economics is a lot like believing in Santa Claus.
Most Americans grow up believing some chubby guy in a red suit has the stamina to deliver gifts worldwide to billions of people in a single night. Young children, by their nature, are self-absorbed and gullible enough to think that Santa knows how they behaved throughout the year and will deliver presents accordingly.
Most of us grow up and realize that reindeer can’t fly, Santa would freeze to death in the North Pole and his elves would unionize.
But not everyone outgrows gullibility. Some become Keynesian economists. As Keynesians, they don’t quite understand unemployment, because they never experience it – there is plenty of demand for Keynesians, who can find jobs working for the government, in academia or as journalists.
Keynesians believe that increased government spending (aka “aggregate demand”) stimulates the economy and money can be handed out, like Christmas presents, with only positive consequences. They even believe that a dollar spent by the government results in many dollars being spent throughout the economy (the “Keynesian multiplier”). Since they believe there is a Santa Claus, they give little thought to the reality that someone, somewhere has to pay for this largesse.
The Keynesian answer to the $18 trillion federal debt is to keep on spending.
Keynesians believe that money can be printed by the truckload with no ill effects and that higher inflation and higher employment are linked, even though seven Nobel Prizes have been awarded since 1974 to economists who are critical of the Phillips curve, which makes the link between employment and inflation.
Of course, the more money government spends, the more power those in Congress and the White House have. They can extend unemployment benefits for 99 weeks, spend billions on something called “infrastructure” and reward constituents (e.g., buy votes) by investing in agriculture, solar power and other businesses. Whether or not politicians really believe government spending stimulates the economy, it is convenient for them to be Keynesians.
There’s only one problem – history repeatedly shows that Keynesian economics doesn’t work.
Keynesian Economics RIP?
The nearly trillion dollars in “stimulus” spending that had virtually no positive impact on the economy after the financial crisis is the most obvious recent example of the failure of Keynesian economics. It also turns out, though, that reduced government spending can provide a greater stimulus than increased government spending.
“With the 2013 sequester,” The Wall Street Journal noted, “Keynesians warned that reduced spending and the end of 99-week unemployment benefits would drive the economy back to recession. Instead, unemployment came down faster than expected, and growth returned, albeit modestly.”
In the world of Keynesian economists, what’s good is bad and what’s bad is good, as we witnessed in recent years, when factors such as rising unemployment and falling home sales caused stock prices to increase.
And so, The Journal noted, “Hurricanes are good, rising oil prices are good, and ATMs are bad, we were advised: Destroying capital, lower productivity and costly oil will raise inflation and occasion government spending, which will stimulate output. Though Japan’s tsunami and oil shock gave it neither inflation nor stimulus, worriers are warning that the current oil price decline, a boon in the past, will kick off the dreaded deflationary spiral this time.”
And so, The Journal concluded, Keynesian economics is dead, because “even in economics, you can’t be wrong too many times in a row.”
The Journal’s commentary on Keynesian economics was optimistically entitled, “An Autopsy for the Keynesians.”
Unfortunately, though, the Keynesian RIP is likely just wishful thinking. History has been showing for decades that Keynesian economics doesn’t work – and yet it continues.
The Journal commentary proved its premise wrong, noting: “Keynesians forecast depression with the end of World War II spending. The U.S. got a boom. The Phillips curve failed to understand inflation in the 1970s and its quick end in the 1980s, and disappeared in our recession as unemployment soared with steady inflation.”
If Keynesian economics has survived – and even thrived – in spite of decades of evidence that it doesn’t work, why would that change now?
The U.S. has, at least temporarily, abandoned stimulus spending and quantitative easing, but Keynesian economics is far from its deathbed in the U.S. and it continues to thrive globally. While the Federal Reserve Board has taken a sabbatical from its Keynesian policies, Zerohedge wrote:
“… with the other Central Banks ipso facto picking up the baton even before it hits the ground proves … we are now living in a ‘Keynesian Shangri-la.’ ”
Meanwhile, in the U.S., Bloomberg economics editor Peter Coy recently wrote, “Why John Maynard Keynes’ Theories Can Fix the World Economy.”
So Keynesian economics lives on. Those who make their living off of believing in Santa Claus will continue to believe in Santa Claus, all evidence to the contrary. Pass the milk and cookies.