Utah Free Press

Playing Kick the Can with Keynesian Economics

By Richard Okelberry, March 2nd 2010 - If we are learning nothing else from this recession, we are all at least becoming much more acquainted with Keynesian economics.  While debate continues to rage between the left and the right about the ability of this economic theory to help bring the country out of recession, there has always been one major, undisputable flaw to the system.  Keynesian economics, regardless of it’s effectiveness in managing the economy, always has and always will dramatically grow the size of the government.

This fatal flaw is never more evident than in a statement made by Utah State Senator, Fred Hunsaker (District 11, Logan) at a recent “listening session” with state lawmakers.

“All the stimulus that came last year…it’s not here now. It’s gone. So now what do we replace it with?  Well, we replace it with rainy day money. But all that does, is that’s one-time money again. So we kick the can further down the street. We’ll have to pay the piper sometime.” – Sen. Fred Hunsaker

When the recession hit, every state in the country found its self facing a serious revenue shortfall.  As people lost there jobs and profits for industry began drying up, there simply wasn’t enough cash coming in to pay for all the obligations that the various states had made.  While Utah was in better financial shape than most, when the federal government came along with some Stimulus money to spread around and help pay the bills, the temptation was simply too great.  It was far too easy, even in a conservative state like Utah, to take the cash, balance the budget and make a few capitol improvements.

Of course now that the stimulus money has dried up, the state is left wondering how in the world they are not only going to balance the budget but also fund the new obligations/programs that the stimulus made possible.  This same cycle has been occurring since Keynesian economics was first introduced.  During hard times the government hands out a bit of cash, new government programs are created which require more government employees which eventually require higher taxes to pay for those new positions when the economy improves.  When the next recession hits, the entire cycle starts over again and the government grows even bigger.

If Karl Marx had known of the Keynesian economic theory, he would have no doubt been a huge fan.  Karl Marx predicted that eventually capitalism would be converted through socialism into communism.  If he had known that Keynesian economics was such a powerful tool for growing the government he might have given it preference to his “Social Revolution” that relies so heavily on the dirty business of often violent class warfare.

Keynesian economic theory is also known as Keynesianism because while its effectiveness is widely disputed and scientifically unproven, some economists and many on the left preach and advocate its use with almost religious zeal.  While President Obama seems convinced that this theory is sound and believes it to be widely regarded by economists as the best way of dealing with the recession, there are those that certainly disagree with him.

“Massive government spending likely lengthened the economic struggles each time. Economists in the field are deeply divided on the issue of federal stimulus … I don’t know why Obama said all economists agree on this. They don’t. If you go down to the third-tier schools, yes, but they’re not the people advancing the science.”

– Edward Prescott, Nobel Prize winner for economics in 2004 for his study on business cycles. (Arizona State University – http://wpcarey.asu.edu/ecn/prescott_nobel.cfm)

This theory that President Obama seems to hold so much faith in was born out of desperation during the Great Depression by the economist John Maynard Keynes.  In its most basic form, it calls for direct intervention by the government in the free-market economy to reach “Full Employment” and “Price Stabilization.”  John Maynard Keynes basically gave politicians a pro-active way of dealing with the Great Depression.  No doubt that when given the choice of doing nothing and allowing the economy to self correct or appearing to their constituents to be actively working on “fixing” the economy, the Keynesian way was as it is today, just too attractive. 

Keynes followers during the Great Depression were essentially telling politicians of the time that they could stabilize the economy through the use of stimulus spending and maintain the economy through the manipulation of currency, tax rates and interest rates.  While we have been using Keynesian economics in one way or another since the 1930s, to date the U.S has never reached the Full Employment or Stabile Prices that were promised by what appeared to some at the time to be a utopian system.  We have however been growing the size, scope and influence of the Federal Government at an astonishing rate; along with the tax rates needed to support that growth.

In the 20 years before the implication of Keynesian economics the bottom bracket tax rate went from 1% in 1915 to 6% in 1918 then back down to 1% just before the Great Depression.  This was the last time our nation saw single digit tax rates as rates steadily rose to accommodate the growth of the government under Keynesian economics manipulations.

Ultimately, if Keynesian economics grows the government then logic dictates that through its use, the government will continue to grow until nothing but government is left.  Eventually, the growth of the government and the need for society to support its growth will become too much of a burden on free-market capitalism.  As capitalism begins to fail at the hands of government the entire economic system will begin to collapse.  This will eventually lead to even more governmental involvement and assistance until every industry in one way or another is nothing more than a branch of the government.  The fact that the government had to step in and purchase controlling share of General Motors (one of the worlds largest manufacturers) in 2009 is a perfect example of this.

If we cannot find some way to stop the terrible temptation that Keynesian economics creates in the hearts of politicians, John Maynard Keynes will ultimately have his way with us.

 “The best way to destroy the capitalist system is to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens.” – John M. Keynes