Investors Business Daily titles its editorial today, “Keynesianism, RIP,” declaring the government-spending stimulus philosophy discredited in the wake of the 19th consecutive month of 9% or higher unemployment rates. IBD wants Barack Obama to put aside his “stubborn pride” (and his economic team) and start working with Republicans on policies that will truly stimulate the economy. But is the death certificate for Keynesianism premature?
Please, Mr. President, you and your economic team of born-again Keynesian central planners have had your chance.
Remember having to fire Christina Romer, among others, for forecasting your $800 billion stimulus bill would keep the jobless rate below 8%? Now, private economists are forecasting a 10% rate for next year. For the first time, the U.S. is facing Euro-style structural unemployment. This is no time to be raising taxes.
Yet, in a sign that ideology still trumps reality, Romer’s replacement carries on the discredited tax-and-spend torch. …
An unrepentant Obama insists the lopsided election was a referendum on the economy and not a repudiation of his policies. He says voters were “not thinking clearly” when they voted for change.
Who’s not thinking clearly, Mr. President?
It’s worth noting that John Maynard Keynes gets a little bit of a bad rap in this debate. Keynes never argued that debt didn’t matter, which is the argument at the heart of what we’re calling Keynesianism. Keynes argued for spikes in government spending during recessions, but funding those through the collection of surpluses during boom years. Instead of spending out of accumulated but moribund American wealth, we’re spending Chinese wealth — with interest. That isn’t what Keynes had in mind.
I’m also reminded of what professed Communists said at the end of the Soviet era. Communists claimed that the Communist bloc collapsed in 1989-1990 because they just didn’t do Communism well enough, or purely enough. We’re hearing much the same argument from modern-day Keynesians, who claim that Obama didn’t spend enough borrowed money, even though there were few voices in early 2009 advocating for spending on a multi-trillion dollar scale. The failure was one of courage, not Keynesianism, and all we need to do is borrow perhaps as much as a full year’s federal budget in addition to the normal spending, and have government spend that, too.
Those arguments fail on the evidence. Not only did the Porkulus package fail to stop unemployment from rising above 8% as predicted by Obama’s economic team, it also failed to sustain growth beyond its own stimulation. It’s Cash for Clunkers writ large, an attempt to fool people into believing that the economy is showing real organic growth rather than the obvious short-term effects of government spending. It should be called Peter Panism, or Tinkerbellism, especially when its advocates insist that the only way to keep it alive is by clapping your hands.
But that doesn’t mean Keynesianism is dead. It may be momentarily discredited, but it has a powerful attraction to politicians. Modern-day Keynesianism allows them to look busy during a crisis and act as though they’re, well, acting. It also allows politicians to get their hands on a lot of cash — and that allows them to share the spoils with key backers and constituents. It’s practically built for pork. Perhaps even more seductively, it gives politicians the illusion of control over the economy, allowing them to pick winners and losers. Unfortunately, that is just an illusion; as Hayek explains in The Road to Serfdom, the economy is too complicated for central controllers to operate it, and those attempts to do so result in economic ruin.
That was the reason Communism failed, and it’s the reason modern-day Keynesianism fails as well. Putting the resources in the hands of bureaucrats rather than the market stakeholders makes markets less efficient, distorts incentives and outcomes, and inevitably leads to economic failure. If we learn that much this time, perhaps we can at least put modern-day Keynesianism into a coma for another few decades.