Nathan Sass

RIP John Maynard Keynes

In Barack Obama, Economics, Politics, Tax Policy, Taxes on January 25, 2010 at 7:00 PM

Our President and his advisors love John Maynard Keynes. So did FDR. So who is this guy and why does it matter?

Keynes was a British economist at the turn of the century and developed a new macroeconomic theory. In plain English, he said that the government, through deficit spending and changes to the supply of money, could control the business cycle. This means, in theory, that that recessions and booms are muted and the swings less violent.

FDR was the first to put these theories to the test. Even before the official publication of Keynes’s paper The General Theory of Employment, Interest and Money in 1936, FDR instituted policies to end the Great Depression. We know this as The New Deal.

The New Deal was a collection of federal “make work” programs and agencies that were, on paper, meant to employ the unemployed. The money these people “made” (more like given, really) was supposed to create demand in the private sector and restart the economy and lead to economic growth and job creation.

But, like all good egg head ideas (always loved by the left), this works fantastic on paper and nowhere else. (for more details see: http://newsroom.ucla.edu/portal/ucla/FDR-s-Policies-Prolonged-Depression-5409.aspx?RelNum=5409 and http://www.econ.yale.edu/seminars/echist/eh02/ohanian-021008.pdf)

What really happened? Well, unemployment did go down for the first few years, but the government debt was piling up fast. You can’t do that that endlessly, so the spending HAD to slow down significantly.

The money those people made did little to nothing to spur any private sector growth, and little to no private sector jobs resulted. The following table shows unemployment in this period through to the start of WWII.

Year Rate
1920 5.2 %
1928 4.2
1930 8.7
1932 23.6
1934 21.7
1936 16.9
1938 19.0
1940 14.6
1942 4.7%

Source: U.S. Department of Labor, Bureau of Labor Statistics.

There was a drop in unemployment in 1934 and 1936, but when spending was reduced after 1936, unemployment rose again.
Worse yet, government debt stole funds from the privatge sector, making loans more epensive and stifiling any growth.  No growth means no jobs.  We piled up huge deficits and had nothing to show for it at all.

Only when WWII started did the unemployment rate come down to pre Depression levels, but that had almost nothing to do with FDR, The New Deal or Keynes theory.

In fact, in 1940, the US was producing arms at a fantastically high rate, employing people to do so, and leasing/selling/”lending” them to the UK. This had a simulative impact on the economy because the capital was coming into the economy from the outside. This is the cause of almost all economic growth.

When millions of American men of employment age entered the armed forces, unemployment evaporated and the economy began to recover.

Fast forward to 2009 and President Obama. We are told he is “intelligent” and well studied.  Poppycock, I say.

If he was either of those things, he would have understood that Keynes’s theory and FDR’s New Deal were abject failures, and not to be repeated.

Instead, we got a stimulus package that has spent over $700,000,000,000.00 and netted a loss of jobs since it was enacted. Unemployment is higher now than when it was signed into law. Income is down. Foreclosures are up. Nothing has improved.

Liberals love Keynes and his theory for a very fundamental reason. It gives government (them) control of the economy. Since most liberals are truly socialists or communists, government control of the economy is essential to their belief system.

Being smarter and better than the rest of us, they are far more qualified to run economies, and own businesses. So now the Obama led US Government owns AIG, GM, Chrysler, all student loans, and controls all the large banks.

So from now on, when you hear President Obama say stimulus, remember the failure of his first attempt, and fight the next one.

The best way to get people to spend more is to take less from them in taxes. There is a hard economic effect (more take home pay) and an even bigger psychological impact (positive economic outlook). Tax cuts ended the recessions of 1982, 1992, and 2000 quickly and quietly.

Things will improve faster if the public is left alone with more of THEIR money in their pocket, and our children’s children’s children will not be paying off our debts, either.

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