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Obama Wants to Continue the Discredited Keynesian Policies of the Past
Raymond Richman, 12/21/2012

Congress, in a bill signed by Pres. Obama in 2011, called for sequestering expenditures and mandating that taxes return to the levels that existed before the Bush tax cut if the federal government does not take other steps to reduce the federal deficit. Dr. Bernanke, chairman of the Federal Reserve Board, because he subscribes to the discredited Keynesian policy of stimulating the economy by means of increased government expenditures, described the bill’s provisions, as “going over the cliff” if they were implemented because it would increase taxes and reduce expenditures and thereby force the economy into another recession. The media unanimously approved and popularized the metaphor.

The bill violates the Keynesian rule that to provide economic stimulus taxes should be lowered not increased and government expenditures should be increased and not reduced. The bill does both. It cuts expenditures and raises taxes. Pres. Obama has been pursuing Keyesian policies since his first inauguration with a notable lack of success. The recovery from the 2008 recession has been incorrectly described as the slowest recovery in our history. That is wrong. The recovery from the Great Depression was slower. The trouble is that Keynesian policies cause a decrease in private investment expenditures and an increase in investment is required for economic growth. Keynesian policies do not stimulate growth but actually impede growth because of their negative effect on private investment in plant and equipment.  

The truth is that Pres. Franklin Roosevelt’s “new deal” was a monumental failure economically. The recovery of the economy after WWII was fueled by increased private investment expenditures which grew while government expenditures were going DOWN. In fact, Keynesian economists were predicting a postwar depression. The following table shows that increased government expenditures from 1929 to 1940 did not increase GDP while the 50% decrease in government expenditures from 1945 to 1950 was accompanied by a 32 percent increase in GDP. It was the increase in private investment that caused the economy’s growth in the 1950s as the following table, not adjusted for inflation,  suggests.

Category                                  1929           1940            1945           1950

                                                (billions of dollars)

Gross Domestic Product                103.6        101.4          223             293.7

Consumption                                77.4          71.3          120             192.2

Gross Private Investment               10.8          13.6            10.8            54.1

Exports-Imports                           0.4            1.5             -0.8              0.7

Government purchases                  9.4           15               93              46.7                   

Pres. Obama’s  $800 billion 2009 economic stimulus plan and the continuing TRILLION DOLLAR annual budget deficits in 2010,2011,and 2012 produced hardly any recovery at all. The fact is that private investment expenditures stagnated and the growth in GDP increased LESS than the government deficit. Whereas the U.S. federal debt increased by $1.9 trillion in 2009, GDP fell $378 billion. The U.S. federal debt increased $1.6 trillion in 2010 while the increase in GDP was only $525 billion and in 2011 the increase in debt was $1.3 trillion and the increase in GDP was only $577 billion. It appears that increasing government expenditures to stimulate the economy is not only a doubtful stimulus, it appears to be an inefficient mechanism.

It is time to try a free market solution. Balance the federal budget. Reduce the size of government. It is no accident that the U.S. economy has slowed in recent decades. A growing government is a drag on the economy. The negative effects of achieving a balanced budget will be temporary and are required to restructure wages and prices, but recovery will be attained sooner. That is the policy that the European community is imposing on Greece, Spain, Portugal, and Italy. It is my belief that the European community will recover sooner than the U.S. will.  Overspending is what caused the recession in Europe and in the U.S.. Increased spending is not a cure for overspending.