Obamanomics: The Final Nail In the Discredited Keynesian Coffin

Published July 12, 2012

Keynesian economics is the false vision of human action which says the way to promote economic recovery and renewed growth is through increased government spending, deficits and debt.  If that sounds nuts, that’s because it is.

The idea is that the increased government spending and deficits will increase demand in the economy for more production, and that producers will increase supply to meet that demand, hiring more workers and reducing unemployment in the process.  Keynesian economics arose in the 1930s in response to the Depression.  It never worked then, as the recession of 1929 extended into the decade long Great Depression.  And it never worked anywhere it’s been tried since then, in the U.S. or abroad.

By the 1970s, Keynesian policies had produced double digit unemployment, double digit inflation, and double digit interest rates, all at the same time, along with four successive worsening recessions from 1969 to 1982.  Keynesian monetary policy involves running up the money supply to increase demand, with artificially lowered interest rates promoting more spending.  That is where the inflation came from.

Ronald Reagan explicitly scrapped Keynesian economics for the more modern supply side economics, which holds that economic growth results from incentives meant to boost production.  That results from reduced tax rates, which enable producers to keep a higher proportion of what they produce.  It results from reduced regulatory costs, which also increases the net reward for increased production. And it results from monetary policies maintaining a strong, stable dollar, without inflation, which assures investors that the value of their investments will not be depreciated by inflation or a falling dollar, or threatened by repeated recessions resulting from policy induced boom/bust cycles, as in the 1970s.

The results of these Reagan supply side policies have been recounted in several prior columns, and in thorough detail in my 2011 book America’s Ticking Bankruptcy Bomb.  Inflation was quickly whipped, cut in half by 1982, and in half again by 1983, never to be heard from again until recently.  At the same time (which the Washington establishment said was impossible simultaneously), the economy took off on a 25-year economic boom from 1982 to 2007, interrupted by just two, short, shallow recessions, widely recognized in the economic literature, and by the National Bureau of Economic Research, as one long boom.  During the first 7 years of that boom alone, the economy grew by almost one-third, the equivalent of adding the entire economy of West Germany, the third largest in the world at the time, to the U.S. economy.

Supply side godfather Art Laffer and Wall Street Journal Chief Financial Writer Steve Moore summarize in their 2008 book, The End of Prosperity,

“We call this period, 1982-2007, the twenty-five year boom – the greatest period of wealth creation in the history of the planet.  In 1980, the net worth – assets minus liabilities – of all U.S.households and business…was $25 trillion in today’s dollars.  By 2007, …net worth was just shy of $57 trillion.  Adjusting for inflation, more wealth was created in America in the twenty-five year boom than in the previous two hundred years.”

Economist Henry Nau added in the Wall Street Journal on January 26, “the U.S. grew by more than 3% per year [in real terms] from 1980 to 2007, and created more than 50 million new jobs, massively expanding a middle class of working women, African-Americans and legal as well as illegal immigrants.  Per capita income increased by 65%, and household income went up substantially in all income categories.”

Similarly, Steve Forbes wrote in Forbes magazine in 2008,

“Between the early 1980s and 2007 we lived in an economic Golden Age.  Never before have so many people advanced so far economically in so short a period of time as they have during the last 25 years.  Until the credit crisis, 70 million people a year [worldwide] were joining the middle class.  The U.S. kicked off this long boom with the economic reforms of Ronald Reagan, particularly his enormous income tax cuts.  We burst from the economic stagnation of the 1970s into a dynamic, innovative, high tech-oriented economy.  Even in recent years the much maligned U.S. did well. Between year-end 2002 and year-end 2007 U.S. growth exceeded the entire size of China’s economy.”

In other words, the growth in the U.S. economy from 2002 to 2007 was the equivalent of adding the entire economy of China to the U.S. economy.

But Obama, who playacts like he was asleep during this whole time, like Rip Van Winkle, tells us it didn’t work.  While many voters in 2008 thought they were electing a progressive, forward-looking President, Obama has turned out to be the most regressive, backward looking President in American history, taking us back to the failed, discredited Keynesianism of the 1930s to 1970s, as if nothing at all interesting happened from 1980 to 2007.

Apparently determined to prove once more that Keynesian economics doesn’t work, Obama’s first major act in office was to pursue the unreconstructed Keynesianism of the nearly $1 trillion so-called “stimulus,” which we now know didn’t stimulate anything except government spending, deficits and debt.  Obama promised us at the time that if his “stimulus” bill passed, the unemployment rate would never exceed 8%, and would decline to 5.8% by May of this year.  But in reality it was 8.2% and rising in May.

Last Friday’s jobs report for June indicated that the most commonly cited U3 unemployment rate remains stuck at 8.2%.  That makes 41 straight months of unemployment over 8%, which the Joint Economic Committee of Congress confirms is the worst recovery from a recession since the Great Depression almost 75 years ago.  Indeed, the last time before Obama that unemployment was even over 8% was December, 1983, when Reaganomics was bringing it down from the Keynesian fiasco of the 1970s.  It didn’t climb back above that level for 25 years, a generation, which is another measure of the spectacular success of Reaganomics.