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SEPTEMBER 11, 2009, 3:37 P.M. ET
The Keynesians Were Wrong Again
We won't see a return to growth without incentives for job-creating investment.
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By PETER FERRARA
From the beginning, our representatives in Washington have approached this economic downturn with old-fashioned, Keynesian economics. KeynesianismĂ˘â‚¬â€ťnamed after the British economist John Maynard KeynesĂ˘â‚¬â€ťis the theory that you fight an economic downturn by pumping money into the economy to "encourage demand" and "create jobs." The result of our recent Keynesian stimulus bills? The longest recession since World War IIĂ˘â‚¬â€ť21 months and countingĂ˘â‚¬â€ťwith no clear end in sight. Borrowing close to a trillion dollars out of the private economy to increase government spending by close to a trillion dollars does nothing to increase incentives for investment and entrepreneurship.
The record speaks for itself: In February 2008, President George W. Bush cut a deal with congressional Democrats to pass a $152 billion Keynesian stimulus bill based on countering the recession with increased deficits. The centerpiece was a tax rebate of up to $600 per person, which had no significant effect on economic incentives, as reductions in tax rates do.
Learning nothing from this Keynesian failure, which he vigorously supported from the U.S. Senate, President Barack Obama came back in February 2009 to support a $787 billion, purely Keynesian stimulus bill.
Even the tax-cut portion of that bill, which Mr. Obama is still wildly touting to the public, was purely Keynesian. The centerpiece was a $400-per-worker tax credit, which, again, has no significant effect on economic incentives. While Mr. Obama is proclaiming that this delivered on his campaign promise to cut taxes for 95% of Americans, the tax credit disappears after next year.
The Obama administration is claiming success, not because of recovery, but because of the slowdown in economic decline. Last month, just 216,000 jobs were lost, and the economy declined by only 1% in the second quarter. Based on his rhetoric, Mr. Obama expects credit for anyone who still has a job.
The fallacies of Keynesian economics were exposed decades ago by Friedrich Hayek and Milton Friedman. Keynesian thinking was then discredited in practice in the 1970s, when the Keynesians could neither explain nor cure the double-digit inflation, interest rates, and unemployment that resulted from their policies. Ronald Reagan's decision to dump Keynesianism in favor of supply-side policiesĂ˘â‚¬â€ťwhich emphasize incentives for investmentĂ˘â‚¬â€ťproduced a 25-year economic boom. That boom ended as the Bush administration abandoned every component of Reaganomics one by one, culminating in Treasury Secretary Henry Paulson's throwback Keynesian stimulus in early 2008.
Mr. Obama showed up in early 2009 with the dismissive certitude that none of this history ever happened, and suddenly national economic policy was back in the 1930s. Instead of the change voters thought they were getting, Mr. Obama quintupled down on Mr. Bush's 2008 Keynesianism.
The result is the continuation of the economic policy disaster we have suffered since the end of 2007. Mr. Obama promised that his stimulus would prevent unemployment from climbing over 8%. It jumped to 9.7% last month. Some 14.9 million Americans are unemployed, another 9.1 million are stuck in part-time jobs and can't find full-time work, and another 2.3 million looked for work in the past year and never found it. That's a total of 26.3 million unemployed or underemployed, for a total jobless rate of 16.8%. Personal income is also down $427 billion from its peak in May 2008.
Rejecting Keynesianism in favor of fiscal restraint, France and Germany saw economic growth return in the second quarter this year. India, Brazil and even communist China are enjoying growth as well. Canada enjoyed job growth last month.
U.S. economic recovery and a permanent reduction in unemployment will only come from private, job-creating investment. Nothing in the Obama economic recovery program, or in the Bush 2008 program, helps with that.
Producing long-term economic growth will require a fundamental change in economic policiesĂ˘â‚¬â€ťlower, not higher, tax rates; reliable, low-cost energy supplies, not higher energy costs through cap and trade; and not unreliable alternative energy surviving only on costly taxpayer subsidies.
Unfortunately, Mr. Obama seems to be wedded to his political talking points, and his ideological blinders seem to be permanently affixed. So don't expect any policy changes. Expect an eventual return to 1970s-style economic results instead.
Mr. Ferrara, director of entitlement and budget policy for the Institute for Policy Innovation, served in the White House Office of Policy Development under President Reagan, and as associate deputy attorney general of the United States under the first President Bush.