Monday, August 23, 2010

Why is the Left so Profoundly Keynesian?

Kevin A. Hassett explains:
Initial claims for unemployment benefits surged to 500,000 in mid-August, a level more typical of a recession than a recovery. The bad news confirmed what conservative economists have been saying for some time: The biggest Keynesian stimulus in U.S. history was a bust.

Incredibly, some Keynesians who supported Barack Obama's $862 billion stimulus now claim it fell short of their goals not because the idea was flawed, but because the spending package was too small. Christina Romer, the departing chairman of Obama's Council of Economic Advisers, has become a minor cult hero to the Keynesians, thanks to news reports that said her analysis in 2009 suggested the stimulus should be in the range of $1.2 trillion, or 40 percent larger than it turned out to be.

The notion that a much-larger U.S. stimulus would have been more successful isn't backed up by evidence. Maybe there would be an argument if some countries were now booming because their stimulus packages were larger. Or if some previous U.S. administration had tried a bigger stimulus and had better luck.

The fact is, the U.S. stimulus was the largest among members of the Organization for Economic Cooperation and Development, and the biggest ever tried in the U.S.

Nor does the academic literature support what we might call these Not-Enough Keynesians.

A 2002 study by economists Richard Hemming, Selma Mahfouz and Axel Schimmelpfennig of recessions in 27 developed economies from 1971 to 1998 found that increased spending by government had, in almost all cases, a barely noticeable impact, and sometimes a negative one. Heavily indebted countries that spent more in recessions grew about 0.5 percent less, relative to trend, than countries that didn't, the study found.

Ask Joe

Why is the left so profoundly committed to stimulus-by- spending, even though there is scant evidence that it succeeds?

Joe the Plumber knows the answer: The left has become religiously Keynesian because that is the only corner of economics consistent with its redistributive ideology.

You remember Joe. During a campaign stop in the 2008 presidential election, Samuel Joseph Wurzelbacher asked Obama whether higher taxes would punish his business. Obama answered in part, "I think when you spread the wealth around, it's good for everybody."

Obama's words captured Democrats' ideology: outside of fairy tales, only government can play Robin Hood, taking money from the rich and giving it to the poor.

The problem, of course, is that high tax rates inevitably cause economic harm. Such a link is at the core of economics. If you reduce the reward for an activity, you get less of it. Democrats and the economists who serve them deny that harm so they can spread the wealth around....

As the economic data again head south, it will be much harder to devise successful economic policies because of the budgetary hole that the Keynesians have dug for us.

In all likelihood, the data will soon be so convincingly bad that we'll again debate the need for an economic stimulus. Let's hope that when that begins, all will finally concede that the ideas of John Maynard Keynes are as dead as the man himself, and that Keynesianism is the real voodoo economics.
In addition to the empirical data that points to the failure of Keynesian stimulus programs, the fundamental death blow to Keynesian is on a theoretical level.

Simply put, a Keynesian stimulus program is the transfer of funds via borrowing (and in the latest incarnation, through taxation) away from the private sector to the government sector. Whereas funds in the private sector end up in the hands of businessmen, who will seek to develop new products and services (and thus grow the economy), funds headed to the government sector will end up in the hands of the politically connected, including important voting blocks. This will cause funds to go to sectors of the economy that perhaps need to shrink, or restructure. Existing sectors, such as the housing sector and the auto sector, have important political constiutiencies that seek to use government funds to prop up their sectors against the price signals that in the private sector are signalling the need to contract or restructure these sectors. Thus, it is no wonder, given the propping up of these sectorrs that need to shrink, that stagnation is the hallmark of Keynesian "stimulus" programs, especially when they are as extensive as they have become during the current Great Recression.

The left, never strong in economics, stops and marvels at the fund transfers they have created to bring more equality to an economy, but fails to recognize that theroad to equality they attempt to force us all to travel is a road that lowers the standard of living for all of us.


  1. I've always thought of Keynesianism as a second attempt (after Marxism) at making government planning work. And, just like Marxism, it's got that perpetual "it didn't work because THEY didn't do it right" theme.

  2. All one has to do is look at where most of the stimulus money is going to understand the why. The Federal government is bailing out their employers (ie state and local government) and if its not their employer its the programs offered by the same that allow them to live on someone else's dime. BTW, they are all for redistribution so long as its not their property being redistributed.

    As for loving Keynesian economics, that is probably becuase most haven't a clue what its about and they are just parroting what they read by fellow posters and what they hear on Fox news for liberals (aka MSNBC). While I do not like Keynes' general theory, he was no champion of Marxism or socialism in any form. He held an almost contemptible opinion of workers and investors alike.