Video: Why Keynesian policies fail

posted at 3:35 pm on November 29, 2010 by Ed Morrissey

The Center for Freedom and Prosperity has another in its Econ 101 video series, this time showing why Keynesian economic policies generally fail to generate sustainable economic growth. The nature of Keynesian interventions target the wrong component of the economy, consumer spending, which AEI’s Hiwa Alaghebandian shows as a consequence of growth more than a specific origin of it. Consumer spending rises when income rises — which can result from enhanced consumer spending, of course, but only if organic in nature. Otherwise, the Keynesian interventions of massive borrowing and government spending not only fail to sustain themselves as we have seen with Porkulus, they also end up reducing future income with heavy debt loads, which will depress spending in the long run:

Think of it as a Cash for Clunkers economic plan on a larger scale.  The intention is to fool people into spending money in order to give the illusion of growth, and have that illusion somehow become reality through a process best known as FM; the M stands for “magic,” and you can guess what the F means.  The problem is that the interventions run out of steam quickly without addressing the actual issues of income and asset value that drives organic consumer spending.  Instead of increasing the size of the pie, we just cut it in different shapes.

The policies implemented in the early 1980s, in contrast, focused on generating growth in investment and income by reducing the government’s role in the economy and their bite out of it.  That approach succeeded in long-term growth and prosperity by increasing the size of the pie.  Critics scoff at this as “trickle-down economics,” but as the last two years showed, the Reagan approach worked while Keynesian Obamanomics has mainly generated nothing but short-term gimmicks and long-term stagnation.

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And yet, the left will keep doing it, over and over and over again.

UltimateBob on November 29, 2010 at 3:39 PM

Hiwa Alaghebandian

Well, helloooooo. Are you from Tennessee? Because you’re the only ten I see.

amerpundit on November 29, 2010 at 3:42 PM

amerpundit on November 29, 2010 at 3:42 PM

Dude, she’s attractive, but she totally looks dead behind her eyes.

fusionaddict on November 29, 2010 at 3:44 PM

amerpundit on November 29, 2010 at 3:42 PM

A rare beauty indeed, and smart, too.

UltimateBob on November 29, 2010 at 3:45 PM

UltimateBob on November 29, 2010 at 3:39 PM

If they weren’t dumb… they wouldn’t be liberals. :D

Murf76 on November 29, 2010 at 3:45 PM

Why couldn’t someone like this lovely young (and very smart) lady have taught me economics at UCLA back in the 60s..

..oh wait, I think I’ve answered my question. Too bad; she does look like a hippie chick in a power suit.

The War Planner on November 29, 2010 at 3:47 PM

You mean borrowing money to buy Chinese goods doesn’t help us. Our enemies in China really want us to keep it up though.

PrezHussein on November 29, 2010 at 3:49 PM

i have a horrible feeling that the Fed is trying to turn cartwheels with QE and ZIRP etc. to basically try to put lipstick on the pig of Obama’s Keynesian policies and the strongly negative impact of healthcare etc. on the business climate.

while the Fed is independent…if the government goes haywire they have to try to right the ship thru monetary interventions…so we have fiscal, policy and monetary interventions all going on at the same time.

r keller on November 29, 2010 at 3:51 PM

As George Reisman said, there is no such thing as “trickle down economics,” there is just the fact that capital grows when left in the hands of those who know how to make it grow.

Sharke on November 29, 2010 at 4:05 PM

“I thought you said ‘Kenyan’”

JSchuler on November 29, 2010 at 4:08 PM

Why Keynesian policies fail

It’s because the country of Keynesia has never had a good economy. Jeez! The country of California…now that is a good model.

Electrongod on November 29, 2010 at 4:08 PM

Coservative woman-smart and beautiful
Liberal woman- never mind

DDT on November 29, 2010 at 4:12 PM

This is yet another example of someone only reading one half of the Keynes cycle.

Yes, Keynes is for deficit spending in hard times … BUT … he was also for running a budget surplus in good times in order to finance that deficit in lean times.

In other words, Keynes would have banked the Clinton surpluses in the Treasury and then use that money now to fund economic stimulus. That is the part of Keynes that the government (and most liberals) don’t understand. All they understand is “spend”. When a budget surplus presents itself, their answer is to “spend more” to make up the difference. So when hard times come, there is no reserve from which to draw and we borrow on our children’s future earnings instead.

crosspatch on November 29, 2010 at 4:14 PM

The Day the Dollar Died (video)
===============================

http://www.youtube.com/watch?v=2N8gJSMoOJc

canopfor on November 29, 2010 at 4:16 PM

crosspatch on November 29, 2010 at 4:14 PM

I agree with you except on this one thing. There was no Clinton surplus. That was projected and it never materialized.

It drives me crazy that these government entities at all levels wastefully spend any excess in their yearly budget because they fear that their budget will be cut for the next year. If all these agencies had banked that surplus instead, they could have ridden out this economic nightmare.

Jvette on November 29, 2010 at 4:25 PM

Hiwa Alaghebandian

She needs a less complicated last name.

I’d be willing to offer mine.

James on November 29, 2010 at 4:30 PM

Didn’t the Fascist FDR prove it was all a joke?

Kenyan economics, where no one can buy a pair of shoes and spends the whole day trying to figure out what to kill for supper, I hear that is the next fad from Michelle.

tarpon on November 29, 2010 at 4:32 PM

She convinced me. And I wasn’t even listening.

Tres Angelas on November 29, 2010 at 4:36 PM

Make no mistake, there are growth industries in the Age of Obama.

repo man
the guy who throws foreclosees out.
payday check cashing guy
lobbyist
lawyer
vogon

and remedial economics lessons.

forest on November 29, 2010 at 4:43 PM

Wow,so Team Hope has got it BackAckwards,but in their
collective mindsets,they are magically creating jobs,
and prosperity!!

So then QE-2 will have a a rendezvous with an iceberg,
crap,ugh,scratch that,America will!!

canopfor on November 29, 2010 at 4:47 PM

Couldn’t you increase GDI by putting more people on the Federal payroll? Since government workers earn a lot more, that would necessarily increase employee payrolls.

hawksruleva on November 29, 2010 at 4:55 PM

This is yet another example of someone only reading one half of the Keynes cycle.

Yes, Keynes is for deficit spending in hard times … BUT … he was also for running a budget surplus in good times in order to finance that deficit in lean times.

In other words, Keynes would have banked the Clinton surpluses in the Treasury and then use that money now to fund economic stimulus. That is the part of Keynes that the government (and most liberals) don’t understand.

Good points. What’s even more of a problem, beyond what liberals fail to understand, is that most Bush Republicans fail to realize that deficits do matter. You should NEVER run up a massive deficit when the economy is strong. Keynes promoted deficit spending only as an emergency measure to prevent recessions from turning into depressions. As long as American and European leaders have engaged in deficit spending over the past 60 years, economic cycles in the western democracies have been far less volatile.

Both China and Russia maintained budget surpluses during the past decade, and were able to spend their way through the worse part of the economic downturn. Contrast this situation to the US, where $4 tril in new federal debt and a huge structural deficit have limited our options.

bayam on November 29, 2010 at 5:14 PM

Thanks for the tips Snooki.

thesheesh on November 29, 2010 at 5:19 PM

you guys are generous with your compliments

tlynch001 on November 29, 2010 at 5:21 PM

Dude, she’s attractive, but she totally looks dead behind her eyes.

fusionaddict on November 29, 2010 at 3:44 PM

I *totally* don’t get that, but she is trying too hard to speak evenly and clearly rather than naturally.

Wild guess she speaks much faster “in person.” She may have memorized this (or it may have been a prompter) but rehearsals would fix that. People also need to learn that they can record web videos in segments instead of “one take.”

Also, people have a harder time remembering what other people wrote than what they write themselves. You could see a couple of times she wanted to say a different word.

She is cute as a button, though.

Merovign on November 29, 2010 at 5:28 PM

You should NEVER run up a massive deficit

bayam on November 29, 2010 at 5:14 PM

If you had just stopped there, you’d have been right.

fossten on November 29, 2010 at 5:44 PM

dead behind her eyes.

fusionaddict on November 29, 2010 at 3:44 PM

O Noes! Sharp knees. . . ;-)

dts-01 on November 29, 2010 at 5:57 PM

I agree with you except on this one thing. There was no Clinton surplus. That was projected and it never materialized.

It drives me crazy that these government entities at all levels wastefully spend any excess in their yearly budget because they fear that their budget will be cut for the next year. If all these agencies had banked that surplus instead, they could have ridden out this economic nightmare.

Jvette on November 29, 2010 at 4:25 PM

Absolutely right!!

Clinton played short-sighted economic games to produce an illusion of surplus!! What he did was refinance the long-term debt with short-term notes. This created a one-time revenue windfall at the expense of long-term revenue stability. He also pushed CRA (along with Barney Frank and Chris Dodd) to create the illusion of a housing boom by forcing banks to make bad housing loans.

Now we are paying the price for Clinton’s folly: we no longer have real financial stability because we have to refinance ALL our (now short-term) debt frequently, and fewer people and fewer governments want to risk holding US Treasury bonds. We also have a surplus of unaffordable housing and our financial system is buried under mountains of bad loans created because of the badly-misguided CRA (Community Reinvestment Act).

Making all of this worse, we have the spendthrift Pelosi/Reid/Obama administration wasting our valuable assets in trillion-dollar chunks on their silly, money-losing, pet projects like “green jobs,” electric cars, windmills, replacing perfectly good highway signs with different color signs, hasty TSA deployment of “gate rape” machines, and the largest government expansion since FDR.

landlines on November 29, 2010 at 6:42 PM

This is yet another example of someone only reading one half of the Keynes cycle.

Yes, Keynes is for deficit spending in hard times … BUT … he was also for running a budget surplus in good times in order to finance that deficit in lean times.

In other words, Keynes would have banked the Clinton surpluses in the Treasury and then use that money now to fund economic stimulus. That is the part of Keynes that the government (and most liberals) don’t understand. All they understand is “spend”. When a budget surplus presents itself, their answer is to “spend more” to make up the difference. So when hard times come, there is no reserve from which to draw and we borrow on our children’s future earnings instead.

crosspatch on November 29, 2010 at 4:14 PM

If you have a surplus and save it in a bank, the bank then uses this money to provide loans. Thus when the economy tanks, and the government spends its surplus, it only moves the money around in the economy, while drying up the credit supply. this provides zero or less benefit to the economy.

If the surplus is stored in a vault, this causes a reduction in the money supply. This in turn triggers the recession you are trying to avoid.

Slowburn on November 29, 2010 at 6:48 PM

In other words, Keynes would have banked the Clinton surpluses in the Treasury and then use that money now to fund economic stimulus.

crosspatch on November 29, 2010 at 4:14 PM

Even if Clinton had somehow generated an actual surplus (rather than an illusion: see my post above), it is not possible for government to actually “bank” a surplus. This is yet another Keynesian folly!!!

landlines on November 29, 2010 at 6:50 PM

Even if Clinton had somehow generated an actual surplus (rather than an illusion: see my post above), it is not possible for government to actually “bank” a surplus. This is yet another Keynesian folly!!!

landlines on November 29, 2010 at 6:50 PM

Slowburn posted an excellent explanation of why this is true while I was composing my post.

landlines on November 29, 2010 at 6:54 PM

Clinton played short-sighted economic games to produce an illusion of surplus!! What he did was refinance the long-term debt with short-term notes. This created a one-time revenue windfall at the expense of long-term revenue stability. He also pushed CRA (along with Barney Frank and Chris Dodd) to create the illusion of a housing boom by forcing banks to make bad housing loans.

What are you talking about? Tax rates were significantly higher under Clinton and spending was far, far lower. How you turn that into ‘short sighted games’ is an interesting transformation.

Now we are paying the price for Clinton’s folly: we no longer have real financial stability because we have to refinance ALL our (now short-term) debt frequently

This is absolutely not the cause of our current fiscal problems. Although it is true that Rob Rubin and co did not predict the next administration would both increase spending by over 30% and lower taxes.

bayam on November 29, 2010 at 7:24 PM

This happened in the steel mill I worked. When guys got good paying jobs they bought a lot more, when they were cut back to lesser jobs they stopped. Sales etc. be damned. Period, Zip, no more. Makes sense to me.

Herb on November 29, 2010 at 7:56 PM

I wonder if she ever spells her own name wrong.

petunia on November 29, 2010 at 8:00 PM

This debt was generated under both parties.

But I do think Bush’s rationale… keeping the Democrats on board for the war for as long as possible was noble enough… but it still contributed to the problems of today.

The root cause is Democrat insistence on belief in Keynesian economics… which has been proven false for many years now.

But it is such a nice little theory allowing them to cover up there own power grabs and enslavement of the people.

I doubt there are many Democrats who have believed it either it was just a cover.

petunia on November 29, 2010 at 8:05 PM

Yes, Keynes is for deficit spending in hard times … BUT … he was also for running a budget surplus in good times in order to finance that deficit in lean times.

With the existence of entitlement programs and politicians competing with each other over who has brought or will bring more “government investment” to their state/district there are no such things any more as surpluses. Keynesian economics therefore fails as a politico-economic theory.

What you get with Keynesianism is higher deficits which leads to higher taxes, reduced investment, lower income and eventually lower tax revenues which Liberals “fix” with higher taxes which leads to lower growth and stagnation.

Basilsbest on November 29, 2010 at 8:09 PM

What are you talking about? Tax rates were significantly higher under Clinton and spending was far, far lower. How you turn that into ‘short sighted games’ is an interesting transformation.

The Clinton economy succeeded because of the Reagan peace dividend and Gingrich’s welfare reform. But at least Clinton was smart enough to take advantage of being in the right place at the right time. Obama would have effed it up.

Basilsbest on November 29, 2010 at 8:17 PM

The left and a part of the right have no intention of a functioning economy

if they break it, which they are working hard at, then when it finally collapses who is left to take control?

The government

that’s the end game for the tyrannical commie scum

Sonosam on November 29, 2010 at 10:15 PM

The left and a including the part of that inflitrated the right have no intention of a functioning economy

if they break it, which they are working hard at, then when it finally collapses who is left to take control?

The government

that’s the end game for the tyrannical commie scum

Sonosam on November 29, 2010 at 10:15 PM

Fixed it.

Slowburn on November 29, 2010 at 11:29 PM

I just luv how Keynesian economics considers my money theirs! All I ever hear is ‘The government can’t afford to let me keep my money”!

Talk to any hoser who believes in this crap and they will tell you the gubmint needs more money! Your money! Never mind the fact they couldn’t run a Popsicle stand and make a profit!

They always tell us the first thing they will have to cut is police, fire, and education. Never mind the money we are gettin’ ripped off for to make Jesus floating in urine be considered art, or the amount of cocaine a rat can ingest before becoming a democrat!

I want to see a line item budget! Lets see what “we the people” find in their spending that we could do without!

AllosaursRus on November 29, 2010 at 11:39 PM

Brilliant! When one understands how Capitalism works, they know that it starts with Capital (investment). Before there are consumers with money to buy, an investor must decide to risk money and hire workers to build the factory/restaurant/whatever. The workers who participate in that construction are the ones who will have the money to be the consumers of that business. The profits go to the shareholders who will also become consumers. And in the end, we are then efficiently creating more goods and services and thus wealth and we are distributing it efficiently. That is the invisible hand at work!

MJBrutus on November 30, 2010 at 6:23 AM

a process best known as FM

In the Coast Guard, it’s known as “PFM”. “Pure” f’ing magic.

Squiggy on November 30, 2010 at 11:30 AM