Keynesian economics has ruled the roost in American economic policy circles for decades, but there’s only one problem: it’s demonstrably wrong.
John Maynard Keynes, director of the British Eugenics Society, theorized that recessions could be ended by deficit spending. Governments could raise aggregate demand by running deficits, this would ‘prime the pump’, and the economy would grow again. If this were true, we would have had a rip-roaring economy ever since the 1970s when the federal government started to run large chronic deficits. We have been running deficits all that time (with minor exceptions around 2000) – even trillion-dollar deficits – but economic growth has been less than stellar throughout much of that period. In addition, big deficits didn’t work at all in Japan’s ‘Lost Decade, but CUTTING deficits did work in Thatcher’s England.
To these cases refuting Keynes, we can add the United States’ immediate post-World War II experience, Ireland (after the mid-1980s), New Zealand (the early 1990s), Sweden (1991), and even Canada (1990s), all instances when government shrank but the economy grew.
Another case: the deficit-fueled stimulus spending of 2008. If Keynes were correct, the $800 billion spent should have jolted us back to trendline growth but, as you can see from the next chart, that didn’t happen:
https://fred.stlouisfed.org/graph/fredgraph.png?g=cbnw
(red trendline added by a friend of The Truth)
The nail in the Keynesian coffin: the United States grew by leaps and bounds in the 19th Century when low government spending and deficits were the norm. So Keynesian economics is completely demolished by the historical record, if one cares to stick to the facts and not some weird beliefs about creating a super-race, er, super-economies.
Think about it: How does deficit spending raise ‘aggregate demand’? If government spends $1, did aggregate demand go up $1? No. The dollar was taxed or borrowed from someone else who was then unable to spend it themselves. The whole thing is a wash and, therefore, Keynesian economics is a wash-out as a matter of theory.
And as a matter of empiricism. The empirically-based Rahn Curve completely destroys Keynesian economics. The Rahn curve shows that government spending is a DRAG on the economy, not a multiplier, after government spending exceeds 15-25 percent of amount of GDP. Government spending in the U.S. is currently around 40 percent of GDP. There is no Keynesian multiplier effect when big bloated government sits on top of everybody, smothering economic dynamism. Keynesian economics holds that higher government spending produces higher economic growth, but the Rahn Curve shows just the opposite when government gets too big:
Mitchell cites several studies before reaching his bottom line: “Government today is far too big and this is hurting growth, undermining prosperity, and reducing competitiveness.”
Writing later for the Foundation for Economic Education, Mitchell parses more recent studies and finds additional support for the Rahn Curve. Quoting from studies:
- “a 10 percentage point fall in the share of national income taken in tax would lead to slightly more than a 1 percentage point increase in the growth rate – results of this order of magnitude occur over and over again.”
- “a fall in the tax rate by 25 per cent of its existing value (from about 40 per cent to about 30 per cent of national income in the UK) would lead to a rise in the growth rate to 2.7 per cent if the initial growth rate were 2 per cent.”
The above studies are buttressed by similar conclusions from Harvard professor Alberto Alesina, Goldman Sachs, and others.
The Rahn Curve has been criticized from the Left, but the criticism only quibbles around the edges – correlation is not causation, many factors influence economic growth, some types of government spending are better for growth than others, etc. Then, the critic does what every good Leftist does when confronted with an irrefutable argument – he tries to CHANGE THE SUBJECT: ‘the environment is more important than economic growth, anyway.’
Many professional economists don’t know about the Rahn Curve, but now you do. You now know enough to understand that the Progressives and other Keynesians don’t have the facts or history on their side. All they have is a superb political machine that, despite all evidence, lumbers on in the halls of power, still managing to dupe the unwary into believing that more government spending is good for the economy when it really isn’t.
But Leftist leaders themselves no longer believe in Keynes. The truth or falsity of the theory doesn’t matter to them and that’s because Keynesian economics is the best excuse ever invented for growing the government and empowering Leftists. Leftist leaders are not interested in the truth; they’re only interested in the career ladder that comes with never-ending deficit spending and big bloated government. To the Left, the issue is never the issue; the issue is always the revolution, and Leftist leaders will ride any horse they can to get there.
Any real debate about Keynesian economics should have ended decades ago. Henry Morgnethau, Jr., Treasury Secretary during the Great Depression, oversaw a Keynesian program for FDR and came away from it deeply cynical, completely disabused of his former weird belief that deficit spending could produce a super-recovery:
- We have tried spending money. We are spending more than we have ever spent before and it does not work. And I have just one interest, and if I am wrong … somebody else can have my job. I want to see this country prosperous. I want to see people get a job. I want to see people get enough to eat. We have never made good on our promises. … I say after eight years of this Administration we have just as much unemployment as when we started. … And an enormous debt to boot.[13]
Crossposted from Liberato.us