Sunday, August 31, 2014

Our 6 Years of Failed Keynesian Economic Practice.

Scott Grannis recently posted a pretty devastating critique of Keynesian economic theory and the abject failure of Keynesian fiscal stimulus in the period following the Great Recession (“the most expensive such failure in the history of the world”), here’s an excerpt below and I encourage you to read the entire post (with charts) HERE.
"Despite assurances from politicians and most economists of Keynesian persuasion, not only did the biggest and most rapid increase in our federal debt burden [in the six years ending June 2014] since WW II fail to boost the economy, it coincided with the weakest recovery in history—growth of only 2.2% per year on average. This is not a problem of not spending enough, it is a failure of ideology, and arguably the most expensive such failure in the history of the world.
Here’s the failure in a nutshell: The government can’t stimulate the economy by borrowing from Peter and sending a check to Paul, because that doesn’t create any new demand—it’s like taking a bucket of water from one end of the pool and pouring it into the other end; the level of the water doesn’t change. And the government can’t stimulate the economy by spending more, because the government is notoriously inefficient (not to mention the fraud, waste, and incompetence that surround most major public initiatives); the private sector is far more likely to spend its money wisely and productively than the government is. Growth only happens when an economy produces more from a given amount of resources—when productivity rises. And productivity only rises when people work more, smarter, and more efficiently, and that takes hard work and risk. You can’t just dial up productivity, you have to work for it. We can’t “spend our way to prosperity,” as the late and great Jude Wanniski told us.
Here’s my interpretation of what really happened in a nutshell: the private sector generated $8.9 trillion of profits in the past six years, and the federal government borrowed 83% of those profits to fund a massive increase in transfer payments, income redistribution, bailouts, subsidies, and a modest increase in infrastructure spending (only 8% of the 2009 American Recovery and Reinvestment Act went to transportation and infrastructure).
What happened to all the profits? Almost all of the most incredible surge in profits in modern times was squandered by our government, flushed down the Keynesian drain.
The past six years in effect have been a laboratory experiment to determine whether Keynesian economic theory is valid. The result? Keynesian economic theory is (or should be) officially dead. It doesn’t work. Government can’t boost the economy by borrowing or spending more money. Politicians will be unhappy to hear this, of course, since they would prefer that we think they can dispense growth and prosperity on demand. Those who insist in perpetrating this myth should be voted out of office."