Keynes: Done in by the deficit

Republicans have a new favorite insult: “Keynesian,” said Ezra Klein in The Washington Post. That’s a reference to John Maynard Keynes, a once-influential British economist. Keynes argued that during recessions, a frightened public stops spending money, causing the downturn to feed on itself. To counteract this downward cycle, Keynes said, governments must pump large amounts of money into the economy when recession strikes—say, by launching infrastructure projects. Keynesian theory used to be so widely accepted that even President Richard Nixon once quipped, “We’re all Keynesians now.” Well, we’re not anymore. After the 2008 economic meltdown, President Obama authorized an $840 billion stimulus package based on Keynesian principles, and it saved millions of jobs. But with the economy sagging again, Republicans are refusing to consider any more spending. They’re demanding deep cuts, and Obama is going along, “making it harder to recover from this crisis.”

Good riddance to Keynes, because he ignored one simple fact, said J.D. Foster in National Review. In order to pump billions into the economy, the government has to borrow money. In so doing, it cuts down on the pool of money that banks make available to businesses and individuals. So “what would have been private investment or private consumption is crowded out in favor of government spending.” This kind of naïve market meddling has already caused huge damage to the U.S. economy, said Peter Ferrara in Forbes.com. In early 2009, unemployment rates in the U.S. and Canada sat at 8 percent. But after Obama’s stimulus program began squandering money, America’s jobless rate actually went up, hitting 9.2 percent last month. In contrast, Canada’s rate has fallen to 7.4 percent today. That’s because instead of relying on “government spending, deficits, and debt,” Canada cut taxes and regulation, giving people genuine incentives to “produce, save, invest, and work.”

Actually, Obama’s 2009 stimulus wasn’t Keynesian enough, said Eugene Robinson in The Washington Post. In order to appease Republicans, Obama agreed that one third of the stimulus package would consist of tax cuts—“which a Keynesian would say are much less stimulative than direct government spending.” That diminished the stimulus’s effectiveness. Sorry, but that argument is moot now, said Ron Ross in The American Spectator. With annual federal deficits now exceeding $1 trillion, the public has lost its taste for massive spending programs. And Obama has also cleared the “all-star Keynesians” from his economic team. For now, at least, Keynesian economics is dead.

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