Tuesday, November 30, 2010

Just Say No to Keynesian Economics

During the past few years, you may have overheard references to "Keynesian Economics" in some of the debates about how to improve the economy.  What exactly is "Keynesian Economics," how is it shaping current U.S. economic policy, and, most importantly, is it a good idea?

Well, first of all, "Keynesian economics" refers to John Maynard Keynes, and is a macroeconomic theory named after him.

John Maynard Keynes knows what's good for you
Let me be clear about one thing: Keynesian economics has absolutely nothing to do with Kenya.  There are a surprising number of people who get this confused.  I had some nutcase on Twitter accuse me of being a racist and hating the President because I voiced an opinion about Keynesian policies.  Ummm, no.  (Side note: if you're  going to try and start a fight with someone on the internet, try not to do it about something that is easily disproved by Google.)

Anyway: here is a video taken at the Stewart-Colbert Rally that has some fun with this common misconception:

YouTube | Obama is not a Keynesian, He's an American!
Now back to the serious stuff.  Keynesian economics is also not socialism or communism, because it does not advocate actual government takeover and/or ownership of private enterprise.  However, it does advocate a high degree of interference with the private economy.

The Keynesians believe that the private sector creates "inefficiencies" and view the cyclical swings of the economy (booms and busts, inflationary periods, recessions, etc.) as something which ought to be tamed or suppressed.  Keynesians support government control over a powerful central bank, centralized fiscal policy, and other actions and interference by the government with the national economy in an effort to stabilize it.

The stimulus bill is a Keynesian type of policy: the justification for the bill was that the massive spending under the bill would increase consumer spending and thereby "stimulate" the economy.  However, this is a fallacy...or in simpler terms, it's complete and utter crap.

Economic growth (increases in small business profits, personal income, investment income, etc.) leads to an increase in consumer spending, not the other way around.  Think about it in terms of your own life - if you go to the mall and spend all your savings, does that make you richer?  Of course not.  On the flip side, if you get a raise at work or make a profitable investment, wouldn't you possibly be more likely to buy a more expensive car, take a nice vacation, or buy a lovely pair of designer shoes?
Buying these shoes won't make you rich.  However, if you are rich, you might buy these shoes.

Here is a great video from the Center for Freedom and Prosperity that explains all this Keynesian stuff in 5 easy minutes (Seriously, watch it.  It's good for you):

YouTube | CFPEcon101 | Keynesian Economics is Wrong: Economic Growth Causes Consumer Spending, Not the Other Way

So, basically, just like you can't get rich by buying a pair of designer shoes, America can't improve the economy simply by having the government spend a humongous pile of money.

And just to make sure we are crystal clear - the reason the  stimulus bill didn't work was not because we didn't spend enough, but because the entire  underlying concept is fundamentally flawed (or, as I so eloquently wrote earlier, "complete and utter crap").

Finally, let's think about what happens if you spend money you don't have: you end up in debt.  Our country is in a big, gigantic, frighteningly deep hole of debt right now, and apparently it seems that none of the Democrats have heard the saying, "If you're in a hole, STOP DIGGING!"

"Forget a ladder!  I can tax and spend my way out!" (Image originally on BigHollywood.com)

Keynesian policies have no chance of getting us out of this debt or saving our economy; they can only dig us deeper into trouble.

I did a Google image search for Keynesian economics and found a wonderfully snarky illustration of the problem: a T-shirt that says - in Chinese - "Keynesian economics makes sense to me:"  

Keynesian economics = China owns us.
To further drive the point home, Citizens Against Government Waste put out a devastating ad right before the election, warning of what may come if we don't "stop digging:"

YouTube | CAGWmedia | Chinese Professor

So remember, Keynesian Economics = nothing to do with Kenya, the economic equivalent of trying to escape a hole by digging it deeper, and always a bad idea (unless you're China).

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