Keynesianism Does Not Work

Dan Mitchell of the Center for Freedom and Prosperity looks at both Keynesian theory and practice and finds that allowing politicians to spend more money is not a recipe for better economic performance.



I do disagree with Mitchell when he says that the "printing money option is off the table." In my opinion the US government is in effect printing money. The money the Fed and Treasury is using to bailout Wall Street, banks, AIG and so on is coming out of thin air. While the government is not physically printing paper money, it is creating money virtually.

More from Mitchell:

President-elect Obama has announced that he wants a big "stimulus" package to create 2.5 million jobs by 2011. ...Some supporters of this new spending seem genuinely convinced that the federal government can create jobs.

In part, this is a debate about Keynesian economics, which is the theory that the economy can be boosted if the government borrows money and then gives it to people so they will spend it. This supposedly "primes the pump" as the money circulates through the economy. Keynesian theory sounds good, and it would be nice if it made sense, but it has a rather glaring logical fallacy. It overlooks the fact that, in the real world, government can't inject money into the economy without first taking money out of the economy. More specifically, the theory only looks at one-half of the equation - the part where government puts money in the economy's right pocket.

But where does the government get that money? It borrows it, which means it comes out of the economy's left pocket. There is no increase in what Keynesians refer to as aggregate demand. Keynesianism doesn't boost national income, it merely redistributes it.

The pie is sliced differently, but it's not any bigger. The real world evidence also shows that Keynesianism does not work. Both Hoover and Roosevelt dramatically increased spending, and neither showed any aversion to running up big deficits, yet the economy was terrible all through the 1930s. Keynesian stimulus schemes also were tried by Gerald Ford and George W. Bush and had no impact on the economy.

Keynesianism also failed in Japan during the 1990s. To be fair, the inability of Keynesianism to boost growth may not necessarily mean that government spending does not create jobs. Moreover, the argument that government can create jobs is not dependent on Keynesian economics. Politicians from both parties, for instance, argued in favor of pork-filled transportation bills earlier this decade when the economy was enjoying strong growth - and job creation generally was their primary talking point.

Unfortunately, no matter how the issue is analyzed, there is virtually no support for the notion that government spending creates jobs. Indeed, the more relevant consideration is the degree to which bigger government destroys jobs. Both the theoretical and empirical evidence argues against the notion that big government boosts job creation..."