Keynesian economic policy fails to pave a path toward deficit reduction, again.
Last year the American people were promised, amid all the massive federal deficit spending to save the economy, a 2011 budget proposal by the White House that would lay a foundation for future federal deficit reduction.
The New York Times, however, reported on Tuesday that the Obama administration is faced with difficult decisions ahead if next year's budget proposal is to keep the promise of federal deficit reduction.
In the same report, Calmes quoted House Budget Committee director, Thomas S. Kahn, as stating "there are unfortunately no politically painless ways to cut the deficit." And, without a cut in federal expenditures, the deficit will fail to drop to "3 percent of the size of the economy" (GDP), as declared in the Obama administration's first budget proposal.
Dare anyone be surprised that deficit spending (borrowing, borrowing, and more borrowing) is failing to reduce the federal deficit?
However, the exact premise underlying economic policy in Washington a year ago was exactly that, the policy prescriptions outlined by Keynes himself --- short-term deficit spending will reverse an economic recession and thus pay for itself.
In his last book, The General Theory, Keynes wrote that artificially low interest rates would not result in a boom bust cycle; newly printed money is no different than individual savings. And, spending is the true path toward prosperity; "the more we spend the more we have." Moreover, governments should aim to eliminate slumps and force an economy to remain in a constant "quasi-boom".
The Keynesian economic model leading policy both in Washington and at the Federal Reserve prescribes such stimulative government actions; prop up prices and increase "aggregate demand."
Moreover, Keynes, and Keynesians alike, incorrectly assume that as long as governments spend and [attempt to] create jobs (even digging up money in old bottles buried by the government), short-term deficit spending will eventually pay for itself. The Keynesian "multiplier", it is said, will lead to full employment, thus a reduction in unemployment insurance (as employed individuals spend, creating more new jobs) and an increase in the federal tax revenue base will surely pay for the government's loan.
"The $1.4 trillion deficit for the 2009 fiscal year, which ended Sept. 30, was about 10 percent of the gross domestic product. Assuming the economy resumes growing, future deficits will be lower simply because of rising tax revenues, lower safety-net spending and the end of the temporary stimulus programs", writes Calmes.
That was a big assumption on Washington's part to base economic policy on. And, unfortunately, although not necessarily surprisingly, the economy has not achieved real growth nor "full employment" as the result of massive government borrow and spend programs. Even more so, federal tax revenues have not increased nor has the stimulus program paid for itself.
Current U.S. economic policy, and since shortly after the current economic crisis began, is erroneously centered around Keynes' multiplier theory; however, the economy has consistently fallen short of real growth. Washington has spent, borrowed, propped up prices, and made every attempt to reverse a "feared" deflationary spiral.
The U.S. economy can still get worse. As [government calculated] unemployment remains in double digits, the Obama administration and Congress are almost certain to continue and propose more of the same economic policy prescriptions, leading the U.S. further down an economically perilous road.
Writer, Hunter Lewis, however, has, as other sound-minded economic writers before him, accurately and effectively show in his latest book, Where Keynes Went Wrong And Why World Governments Keep Creating Inflation, Bubbles, And Busts, how Keynesian economic policy theories are significantly flawed, and in many cases completely and illogically unfounded.
One other concern for the present economic outlook; most Keynesians believe that the 1937 "recession within a recession" was caused by removing monetary and government stimulus too soon. However, the further decline of 1937 was the result of the FDR administration's 1936 tax increase on individual income, and, more importantly, a tax levied on corporate earnings.
The time to throw out the Keynesian economic fallacies is long past due; however, Washington still has a chance to change its course on current economic policy. The U.S. economy can at least avoid a repeat of the "recession within a recession" (1937) if taxes remain low (individual and corporate level), further spending and borrowing programs eliminated, and an immediate discontinuation of economically ruinous protectionism schemes.
Comments