Bury Keynesian Voodoo before It Can Bury Us

Initial claims for unemployment benefits surged to 500,000 in mid-August, a level more typical of a recession than a recovery. The bad news confirmed what conservative economists have been saying for some time: The biggest Keynesian stimulus in U.S. history was a bust.

Incredibly, some Keynesians who supported Barack Obama's $862 billion stimulus now claim it fell short of their goals not because the idea was flawed, but because the spending package was too small. Christina Romer, the departing chairman of Obama's Council of Economic Advisers, has become a minor cult hero to the Keynesians, thanks to news reports that said her analysis in 2009 suggested the stimulus should be in the range of $1.2 trillion, or 40 percent larger than it turned out to be.

The problem, of course, is that high tax rates inevitably cause economic harm. Such a link is at the core of economics.

The notion that a much-larger U.S. stimulus would have been more successful isn't backed up by evidence. Maybe there would be an argument if some countries were now booming because their stimulus packages were larger. Or if some previous U.S. administration had tried a bigger stimulus and had better luck.

The fact is, the U.S. stimulus was the largest among members of the Organization for Economic Cooperation and Development, and the biggest ever tried in the U.S.

Nor does the academic literature support what we might call these Not-Enough Keynesians.

A 2002 study by economists Richard Hemming, Selma Mahfouz and Axel Schimmelpfennig of recessions in 27 developed economies from 1971 to 1998 found that increased spending by government had, in almost all cases, a barely noticeable impact, and sometimes a negative one. Heavily indebted countries that spent more in recessions grew about 0.5 percent less, relative to trend, than countries that didn't, the study found.

Ask Joe

Why is the left so profoundly committed to stimulus-by- spending, even though there is scant evidence that it succeeds?

Joe the Plumber knows the answer: The left has become religiously Keynesian because that is the only corner of economics consistent with its redistributive ideology.

You remember Joe. During a campaign stop in the 2008 presidential election, Samuel Joseph Wurzelbacher asked Obama whether higher taxes would punish his business. Obama answered in part, "I think when you spread the wealth around, it's good for everybody."

Obama's words captured Democrats' ideology: outside of fairy tales, only government can play Robin Hood, taking money from the rich and giving it to the poor.

The problem, of course, is that high tax rates inevitably cause economic harm. Such a link is at the core of economics. If you reduce the reward for an activity, you get less of it. Democrats and the economists who serve them deny that harm so they can spread the wealth around.

The Tax Alternative

If the economy is in deep trouble, there are two economic policy steps that one could take in order to create a positive stimulus: reduce tax rates, or spend more money. (The so-called tax cuts in the 2009 stimulus had little effect because they were primarily credits and deductions, rather than reductions in marginal rates.)

But notice the problem for the Robin Hooders: If you cut tax rates in a recession in order to stimulate the economy, then you are conceding that lower tax rates can be a good thing. And if that's true, then higher tax rates will be harmful--something the left has always denied.

So the Obama economic team was left to rely totally on spending in its response to the recession.

Bad Medicine

Supporters of this type of stimulus are either unfamiliar with the literature or willing to ignore it. The result is policy that is harmful to our country and inconsistent with modern economic science. If the Obama economic team were medical doctors, they would be pushing the use of medicine not approved by the Food and Drug Administration.

As the economic data again head south, it will be much harder to devise successful economic policies because of the budgetary hole that the Keynesians have dug for us.

In all likelihood, the data will soon be so convincingly bad that we'll again debate the need for an economic stimulus. Let's hope that when that begins, all will finally concede that the ideas of John Maynard Keynes are as dead as the man himself, and that Keynesianism is the real voodoo economics.

Kevin A. Hassett is a senior fellow and the director of economic policy studies at AEI.

Photo Credit: iStockphoto/Konstantin Inozemtsev

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About the Author

 

Kevin A.
Hassett
  • Kevin A. Hassett is the State Farm James Q. Wilson Chair in American Politics and Culture at the American Enterprise Institute (AEI). He is also a resident scholar and AEI's director of economic policy studies.



    Before joining AEI, Hassett was a senior economist at the Board of Governors of the Federal Reserve System and an associate professor of economics and finance at Columbia (University) Business School. He served as a policy consultant to the US Department of the Treasury during the George H. W. Bush and Bill Clinton administrations.

    Hassett has also been an economic adviser to presidential candidates since 2000, when he became the chief economic adviser to Senator John McCain during that year's presidential primaries. He served as an economic adviser to the George W. Bush 2004 presidential campaign, a senior economic adviser to the McCain 2008 presidential campaign, and an economic adviser to the Mitt Romney 2012 presidential campaign.

    Hassett is the author or editor of many books, among them "Rethinking Competitiveness" (2012), "Toward Fundamental Tax Reform" (2005), "Bubbleology: The New Science of Stock Market Winners and Losers" (2002), and "Inequality and Tax Policy" (2001). He is also a columnist for National Review and has written for Bloomberg.

    Hassett frequently appears on Bloomberg radio and TV, CNBC, CNN, Fox News Channel, NPR, and "PBS NewsHour," among others. He is also often quoted by, and his opinion pieces have been published in, the Los Angeles Times, The New York Times, The Wall Street Journal, and The Washington Post.

    Hassett has a Ph.D. in economics from the University of Pennsylvania and a B.A. in economics from Swarthmore College.

  • Phone: 202-862-7157
    Email: khassett@aei.org
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