Welcome to the long run

Keynesian economics have been the downfall of American policymaking.

By Geoffrey Lawrence
  • Thursday, January 8, 2009

"But, Lord Keynes, what about the long run effects of government intervention and high deficit spending?"

"This long run is a misleading guide to public affairs. In the long run we are all dead."

Keynes is dead.

Welcome to the long run.

John Maynard Keynes is, of course, the famous economist who is credited with developing the subfield of macroeconomics - sometimes just called Keynesian economics. The American shift to Keynesianism began in the 1930s, and accelerated following the publication of his General Theory of Employment, Interest and Money. Indeed, much of the New Deal was largely a result of his influence. Keynes' approach to economics has dominated American policymaking ever since.

Keynesian economists advocate government manipulation of the market through monetary policy in order to "ensure" economic stability and full employment. Another way of saying this is that Keynesian economists aim to erode the value of the financial assets owned by individuals for the explicit purpose of negating normal market economic dynamism and creativity.

Keynesian economists advocate responding to economic downturns by ramping up government spending. Another way of saying this is that Keynesian economists prefer to respond to declining family incomes by increasing families' tax burdens, whether in the form of debt which has to be repaid or in the form of inflation.

Keynesian economists believe that thrift is a "public vice." They believe that the root cause of a recession is that individuals tend to respond to uncertainty by saving more and spending less. This reverberates throughout the economy and further lowers income and economic production. As such, it is the government's responsibility to save individuals from their own misguided tendencies by forcing them to spend more - the ultimate rationale for government to tax and spend.

In other words, Keynesian economists believe that saving and investment are the roots of all evil. They discard the notion that increased savings makes credit more easily available so that firms can acquire capital equipment and increase worker productivity. They dismiss the idea that investment in machines, factories, computers and new technologies are essential components for long-term economic production.

In fact, as Keynes so aptly summarized, the very premise of Keynesian economics is to dismiss the dynamic returns over the long run of sticking to economic fundamentals. Keynesianism remains perpetually in the short run, giving no thought to tomorrow. The Keynesian mantra is that profligate consumer spending in the present is the only engine that drives economic growth.

Because of the unrealistic time constraints imposed by the Keynesian outlook, saving is viewed not as delayed consumption - the way a standard college textbook on finance would define it - but as the lack of consumption. Essentially, Keynesian economists believe that if an individual does not spend his wages the second he receives them, then he must be burying them underground.

Keynesian economists aim to use the government to fix the "problem" of saving. Using the power of the government, Keynesians can forcibly take money from individuals, primarily through taxation, and use it to increase spending. In the Keynesian view, it matters not whether spending comes directly from individuals or indirectly from them through the government. The only thing that matters is that individuals are not allowed to save.

In the minds of Keynesians, saving is unimportant because they believe that the government can create capital out of thin air. By perpetually expanding the money supply to keep interest rates artificially low, Keynesians believe that they can obviate the need for savings. They disregard the economy-wide misallocation of resources that results from these policies and the inherent inefficiencies that arise. They further disregard the financial industry's inability to accurately measure risk as a result of these policies. These oversights are particularly notable as they are the primary causes of the current financial crisis and associated economic downturn.

Understanding the Keynesian mindset is essential to understanding American policymaking. This mindset has been pervasive and it has existed on both sides of the political aisle. Earlier this decade, Americans were counseled to stave off recession by going shopping. They were told to "get down to Disney World in Florida."

Now policymakers want to address the pitfalls of Keynesianism by redoubling the Keynesian effort. In Nevada, Assembly Speaker Barbara Buckley is calling for tax "restructuring" (i.e., tax increases) in order to maintain spending. At the federal level, President-elect Barack Obama wants to stave off recession by ramping up government spending and "creating" jobs that will be dependent on sustained government spending. Calls are being issued for a "New New Deal."

It is clear that the same Keynesian philosophies that regularly create turmoil in financial markets and turned the 1929 Crash into the Great Depression are at work in the current crisis. It is equally as clear that policymakers should not repeat the mistakes made then by invoking Keynesianism to solve the problems resulting from Keynesianism. American families have no desire to turn a recession into a decade-long depression by adopting New Deal policies. That is why they are saving and not spending. Let us hope that misguided policymakers do not force them to spend more when they should be allowed to save.

The solution to the current crisis can only be a deep and lasting reform in American policymaking. One that is dedicated to market fundamentals. One that recognizes we are in the long run.

Geoffrey Lawrence is fiscal policy analyst at the Nevada Policy Research Institute. This article originally appeared in the January 2009 edition of the Nevada Business Journal.

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