The epitaph for Keynesian economics: si monumentum requiris, circumspice

The article is titled, Obama Presides Over the Feeblest Post-WWII Recovery which doesn’t even get to how bad it has been. Modern statistical tools aren’t up to it, but then neither is the theory. This is how the article ends:

Deep recessions have traditionally been followed by fast recoveries, but Obama broke this mold. In so doing, he proved once again that a combination of chaotic monetary policy, rising taxes, and suffocating government regulation is not a formula for prosperity.

Where is even mention of a problem associated with higher public spending? Not there because no matter where you start from as an economist today, public spending is a positive. And it’s not that monetary policy has been “chaotic”. Stability has been the watchword over the past seven years, rates kept down by Federal Reserve decree. It is that interest rates have been kept artificially very low but where do they teach how disastrous such a policy is? As for regulation, it’s bad but nothing particularly new. No doubt somewhat worse than a decade ago, and should be reversed, but regulation is not the central problem.

Here, however is a different explanation: The United States of Insolvency.

Crises and business cycles are always with us. I merely observe that sound money and a balanced budget were two sides of the coin of American prosperity.

Then came magical thinking. Maybe you had a taste of modern economics in school. If so, you probably learned that the federal budget needn’t be balanced–it’s nothing like a family budget, the teacher would say–and that gold is a barbarous relic. To manage the business cycle, the argument went, a government must have the flexibility to print money, to muscle around interest rates and to spend more than it takes in–in short, to “stimulate.”

Oh, we have stimulated. Between the fiscal years 2008 and 2012 alone, federal deficits totaled $5.6 trillion. The public debt nearly doubled in the same span of years, to $11.2 trillion. The Federal Reserve tickled $1.6 trillion in new digital dollars into existence. True, our Great Recession proved no Great Depression, but the post-2008 recovery is the limpest on record.

It’s not, however, the debt per se. It is that government spending is never value adding. We teach that debt doesn’t matter and public spending is a stimulus. Keynes can truly say as we look across the world’s economies: “si monumentum requiris, circumspice“.

ADDING A BIT MORE: There’s probably not a day that goes by that I am not reminded of how disastrous Keynesian theory has been. There is nothing wrong in principle with doing things that will reduce unemployment and get recovery going. But there is a very great deal wrong in practice with public spending as the vehicle. So we can add this from today:

Middle class takes hit in most cities…
Incomes have fallen in four-fifths of all metro areas…
New American Home: Multi-Generational Living on Rise…

The ridiculous notion that we are falling into some kind of deflationary trap is being promoted because if you are a Keynesian you have virtually nothing else to say since you cannot blame it on the policies you believe must work.

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