American Elephants

Lord Keynes’ Theories Work in Theory, Just Not in Practice. by The Elephant's Child

Robert Samuelson, the economics columnist for the Washington Post, had a recent column on why U.S. economic policy is paralyzed — “one reason is that we are still paying the price for the greatest blunder in domestic policy since World War II.”

Until the 1960s, Americans generally believed in low inflation and balanced budgets. President John Kennedy shared the consensus but was persuaded to change his mind. His economic advisers argued that, through deficit spending and modest increases in inflation government could raise economic growth, lower unemployment and smooth business cycles. …Kennedy’s economists, fashioning themselves as heirs to John Maynard Keynes (1883-1946), shattered…[the old] consensus. They contended that deficits weren’t immoral….This destroyed the intellectual and moral props for balanced budgets.

Walter Heller, chairman of Kennedy’s Council of Economic Advisors, famously spoke of “fine-tuning” the American economy to keep it humming along smoothly. It would throw off wealth and jobs much like an engine throws off work-making energy. At Contentions, John Steele Gordon explains further:

Keynes had argued that economies were machines, “a whole Copernican system, by which all the elements of the economic universe are kept in their places by mutual counterpoise and interaction.” Governments, thought Keynes, could keep an economy humming by deliberately running deficits in times of slack demand. Politicians, of course, were only too happy to have an intellectual justification for spending in deficit. This allowed them to spend money (“the mother’s milk of politics”) in order to satisfy various constituencies without having to raise the taxes needed to pay for the largesse.

But Keynes had argued equally that governments needed to run surpluses in good times, both to keep the economy from overheating and in order to pay down the debt run up in bad times, so that the money could be borrowed again when needed. But with the old consensus on balanced budgets now shattered, that simply proved politically impossible. Politicians, after all, had elections to win. Keynes had been thinking long-term. Politicians always think short-term.

Between 1947 and 1960, the government had run deficits five times and surpluses nine times. Between 1961 and 2012, through boom and recession, war and peace, the government has run surpluses five times and deficits 47 times. (And even those surpluses were essentially accounting fiction: the national debt rose in every one of those “surplus” years.)

Keynes, who was the most famous economist of the 20th century, just didn’t take the self-interested, greedy, political nature of humanity into account in his ‘economy as a  machine’ theory. His theories work in theory, but not in practice. Liberals, unable to criticize any fellow liberal or discard any theory beloved by their predecessors, refuse to give up and keep beating a dead horse.

Mr. Obama’s idea of government is a matter of greasing the palms of those who contribute to his well-being, and he needs revenue to do it. All he knows is the Chicago way of doing government.  Nothing is as telling as his complete contempt for the Republican idea of free people and limited government. When he spoke of “fundamentally transforming America” he didn’t mean what you probably thought he did.

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Good piece by Samuelson. Did you know that he does not vote, on the principle that voting would interfere with his impartiality as a journalist?


Comment by Subsidy Eye

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