Monday, August 23, 2010

Now Can We Call Keynesian Economics Failed? OK, How About Now?

We watched. We waited. We watched and waited some more.

We heard explanations, theories and grand assumptions.

We watched others offer up alternatives, then we watched and waited again.

Still nothing.

Our economy is faltering, straining under the weight of rosy predictions and mysterious economic language used by those who embrace Keynesian economic theory. Nearly every traditional metric of growth has remained stagnant or is showing a decline. Even the newly created metric of "jobs created or saved" isn't doing so well these days, which may account for the fact that it's hardly mentioned.

So, when are we going to declare Keynesianism a failure?

Let's hop in the Wayback Machine and recall our elementary science classes, particularly the definition of the "Scientific Method":

The principles and empirical processes of discovery and demonstration considered characteristic of or necessary for scientific investigation, generally involving the observation of phenomena, the formulation of a hypothesis concerning the phenomena, experimentation to demonstrate the truth or falseness of the hypothesis, and a conclusion that validates or modifies the hypothesis.

1. Observation

2. Formation of a hypothesis.

3. Experimentation

4. Conclusion - is the theory valid or not?

We've had enough time for all these things to occur, so let's take a look at the results, shall we? We'll begin our timeline with the Democrat takeover of Congress in January of 2007. We'll even use a chart.

I use this chart because there are some misguided people out there who still think our fiscal problems are a result of the Iraq war (ie: Bush's fault) like James Carville, Joseph Stiglitz, and Christopher Hayes. As we can see, even with war funding added the Iraq war didn't cause our problems.

What we can see from the chart is the dramatic rise in deficit spending after the Democrats retook Congress. Coincidence? Perhaps not.

The bulk of the argument for Keynesian theory is the "multiplier effect", where government spending results in a multiplication of the money spent.

Let's take a look at how this works. In order to sell his Stimulus plan, President Obama cites this factor.
The administration's talking about spending almost a trillion dollars. It's hoping that'll generate $1.6 trillion throughout the economy.
If this worked, shouldn't we be seeing the result in the form of improved economic numbers? In increased tax revenue? In reduced unemployment figures? If this theory were valid, wouldn't we know by now? Here's the question I always ask: "Does this work when I balance my checkbook?"

With each new report, we receive more indications to the contrary. Unemployment numbers rise "unexpectedly" to near record highs. Tax revenue is down along with business activity. Consumer confidence is nearing record lows.

It would appear that after nearly two years of experimentation and observation, we can reach a conclusion: Keynesianism is a failure. Massive spending by Washington hasn't worked and the numbers prove it. But finding someone to accurately report this fact is proving difficult. In fact, back when the economy was roaring along, two nearly identical economic reports were treated very differently by the press.

So, now what do we do?

Howsabout we get back to basics.

Let's start with a pencil...

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