Professor Allan Meltzer of Carnegie Mellon University has a must-read column in today’s Wall Street Journal, beginning with what should be an obvious statement.
Those who heaped high praise on Keynesian policies have grown silent as government spending has failed to bring an economic recovery. Except for a few diehards who want still more government spending, and those who make the unverifiable claim that the economy would have collapsed without it, most now recognize that more than a trillion dollars of spending by the Bush and Obama administrations has left the economy in a slump and unemployment hovering above 9%.
He then asks a rather important question.
Why is the economic response to increased government spending so different from the response predicted by Keynesian models?
He gives four reasons, beginning with the threat of higher taxes.
First, big increases in spending and government deficits raise the prospect of future tax increases. Many people understand that increased spending must be paid for sooner or later. Meanwhile, President Obama makes certain that many more will reach that conclusion by continuing to demand permanent tax increases. His demands are a deterrent for those who do most of the saving and investing.
I especially like how he highlights Obama’s actions, which clearly show the link between more spending and more taxes. I also would have added the European fiscal crisis, which has made more people aware of the negative long-run consequences of excessive government.
He then lists the negative impact of having the government distort the allocation of resources, a point that is music to my ears.
Second, most of the government spending programs redistribute income from workers to the unemployed. This, Keynesians argue, increases the welfare of many hurt by the recession. What their models ignore, however, is the reduced productivity that follows a shift of resources toward redistribution and away from productive investment.
He then discusses the impact of red tape, a point which I’ve never addressed, but obviously is very important if politicians use Keynesian spending as an excuse for expanding the scope of government as well as the size of government.
Third, Keynesian models totally ignore the negative effects of the stream of costly new regulations that pour out of the Obama bureaucracy. Who can guess the size of the cost increases required by these programs? ObamaCare is not the only source of this uncertainty, though it makes a large contribution.
He then dings the short-term mentality of Keynesians.
Fourth, U.S. fiscal and monetary policies are mainly directed at getting a near-term result. The estimated cost of new jobs in President Obama’s latest jobs bill is at least $200,000 per job, based on administration estimates of the number of jobs and their cost. How can that appeal to the taxpayers who will pay those costs? Once the subsidies end, the jobs disappear—but the bonds that financed them remain and must be serviced. These medium and long-term effects are ignored in Keynesian models.
The only thing I would change about this argument is that he also could have explained that so-called stimulus spending actually destroys jobs, on net, when you also measure the loss of private-sector jobs that takes place when government diverts resources from the productive sector of the economy.
A minor oversight, though, in a blistering indictment of Keynesian economics. Heck, Prof. Meltzer should have taken my place at the NYC debate on stimulus. I suspect, however, that the crowd would have been reached the wrong conclusion even if the ghosts of Milton Friedman and Friedrich Hayek has been resuscitated for the event (yes, I’m still sulking).
In addition to explaining why Keynesian economics does not work, Prof. Meltzer also outlines the policies that should be implemented.
Clearly, a more effective economic policy would aim at restoring the long-term growth rate by reducing uncertainty and restoring investor and consumer confidence. Here are four proposals to help get us there: First, Congress and the administration should agree on a 10-year program of government spending cuts to reduce the deficit. The Ryan and Simpson-Bowles budget proposals are a constructive start. (Note to Republican presidential candidates: Permanent tax reduction can only be achieved by reducing government spending.) Second, reduce corporate tax rates and expense capital investment by closing loopholes. Third, announce a five-year moratorium on new regulations. Fourth, adopt an enforceable 0%-2% inflation target to allay fears of future high inflation.
These are all good ideas, though I would have written that we need a “10-year program of government spending cuts” rather than saying we need “10-year program of government spending cuts to reduce the deficit.”
After all, the federal government is too big, and the damage to the economy would still exist even if the deficit disappeared because $1 trillion of new revenue magically floated down from heaven.
The problem is spending. That’s the fiscal disease facing America. Deficits and debt are just symptoms of that disease.
Obama’s fiscal policy can be summed up in one word…”Obamasnare.”
Obama hands out goodies to particular groups of people, which naturally motivates other groups to demand a handout, too.
This mearly highlights fact that none of the arguments stated by anti-Keynesians are based on the facts on the ground. All those points are based on ideological opinion, not true economics. Sure, anti-Obama statements are red meat to the feeble minded, but it has no basis their truthfulness. Smart people understand that, conservatives don’t.
Keith…..idiot.
WOW! That’s what you got from that Keith? And you are trying to say conservatives aren’t smart?
What part of taking from a producer to give to a non producer causes the producer to quit producing do you not get? The Liberals are all mad at the banks and the rich people because they don’t want to throw their money down the tube and give it all away. Funny thing is, why aren’t the rich Liberals (lots in Hollywood and this includes Obama) giving all their money away if they truly believe in redistribution? Oh, wait, they only want to do that with other people’s money, namely Conservatives. It’s all good when your spending someone else’s hard earned dollar.
Keith, the facts on the ground are that Keynsian stimulus has been tried, under Bush and Obama and that the economy has not recovered. Is that in dispute? I tried to state it as un-ideologically as possible, but I’m not a conservative, so maybe I let my libertarian ideology slip in.
I appreciate any and all attempts to point out the folly of Keynesian economics. Most, however, unnecessarily complicate things. Keynesian “stimulus” doesn’t work because it doesn’t add value to anything, and adding value to things is the only way wealth is produced; hence the only way the economy “grows.” See http://estobrevis.squarespace.com/journal/2011/9/10/john-maynard-keynes-is-dead-viva-hayek.html
Trillions of dollars are created out of thin air for stimulus. That must devalue currency and thus also erode value of savings of people. That, along with other factors cited by economists, must undermine whatever good a stimulus is projected to achieve. I am not a student of economy but this much I am able to grasp.
LOL @ Keith. Keynsian economics has always been a failure regardless of party. When Nixon put the final nail in the coffin of the silver standard he declaired “We are all Keynsians now” Since the demise of the silver standard the value of the funny money issued by the fed has reduced in value 2200%. This is the hidden tax of Keynsian economics.
Sean gets it, simple and sweet. Add value = wealth creation.
Can anyone tell me why they get away with the word “redistribution” when it is a form of theft?
@Katherin Because it”s not politically correct to call a Spade a “Biden shovel”
Thank you Marshall. I got an F- in PC class, and it leaves me with a certain blindness.
Does anyone else see a connection to this current mess and the period of reconstruction after the civil war?
How many $200,000 jobs can we afford?
Can’t we get the same work done for a lot less?
If thos jobs are so important, why is there no bidding for them?