The Keynesian Discount

BigRob

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Great article from the WSJ yesterday.

For three long years, the U.S. has been undertaking an experiment in economic policy. Could record levels of government spending, waves of new regulation and political credit allocation, and unprecedented monetary stimulus re-ignite growth? The results have been rolling in, and they represent what increasingly looks like an historic mistake that deserves to be called the Keynesian growth discount.

The most recent recession of comparable depth and job loss was in 1981-1982, when unemployment hit 10.8%. Huge chunks of industrial America shut down and never re-opened. Yet once the recovery began in earnest in the first quarter of 1983, the economy boomed. As the nearby table shows, growth exceeded 7.1% for five consecutive quarters, and it kept growing at nearly a 4% pace for another two years. Growth didn't dip below 2% in any quarter until the second three months of 1986. This was the Reagan boom.

Now look at the first seven quarters of the current recovery. Only briefly has growth hit 5%, in the fourth quarter of 2009 as businesses rebuilt inventories that had been pared to the bone. Growth has been mediocre ever since, sputtering to a near-stall in the middle of last year, accelerating modestly late last year, and now slowing again. This recovery is as weak as the much-maligned "jobless recovery" of the last decade, which followed a mild recession and at least gained speed after the tax cut of 2003.

Most striking is that this weak growth follows everything that the Keynesian playbook said politicians should throw at the economy. First came $168 billion in one-time tax rebates in February 2008 under George W. Bush, then $814 billion more in spending spread over 2009-2010, cash for clunkers, the $8,000 home buyer tax credit, Hamp to prevent home foreclosures, the Detroit auto bailouts, billions for green jobs, a payroll tax cut for 2011, and of course near-zero interest rates for 28 months buttressed by quantitative easing I and II.

Imagine if President Obama had introduced his original stimulus in February 2009 with the vow that, 26 months later, GDP would be growing by 1.8% and the jobless rate would be 8.8%. Does anyone think it would have passed?

I think this article hits the nail on the head. Keynesian economics has seemingly been shown not to work over and over again, and yet here we are, calling for more. Why?
 
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This concept never made sense on paper and has never failed to fail in practice. Why anyone continues to believe in it is mystifying to me.
 
That's the Keynesian economic theory. Spend, spend, spend. Then borrow, borrow, borrow. Then spend, spend, spend some more.

The Austrian economic theory is the only sensible, and sustainable, economic engine that actually works. "Pay as you go" is clearly the best course.
 
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