Monday, December 2, 2013

Killing Keynes & Krugman: Part 1 Examples of Keynesian failures By Rick Kelo

Killing Keynes & Krugman: Part 1 Examples of Keynesian failures
By Rick Kelo

This is the first of a several article long piece that will expose the ideas of the Sir John Maynard Keynes for what they truly are: a failure whose end has come. Keynes is often dubbed the most influential economist of the 20th century, but not because his ideas are good or because his ideas work - they are neither sound theoretically nor do they work in application.  He is influential only because his ideas are widely adopted.  In the course of disproving Keynesian economics I will also address a few of the limited contributions made by Paul Krugman: Keynes last remaining disciple of any consequence.
I am writing these articles in layman's terms so any non-economist can easily follow along. They will break out as follows: 
  1. Examples of Keynesian failures (this article)
  2. Keynes' Flaws of Government Action in a Recession
  3. Flaws of Stimulus
  4. Government vs. Unemployment
  5. Keynesian Bubble Creation
  6. Keynes' Flaws of Government Action in an Expanding Economy (AKA Clintonomics)

I have long predicted that this coming decade will usher in the death of Keynesian economics, and in all likelihood it will.  Why?  Instead of stimulating the economy government spending in a recessionary period ties an anchor around the economy's neck and slows the natural recovery that otherwise would have happened.  America's present economy and lack of recovery now a full 4 years since the end of the Great Recession (June, 2009) is an example.
Now Keynes' theories center on his belief that government could spend money (fiscal stimulus) and lower taxes or interest rates (monetary stimulus) as a way to trick the economy into hiring & decreasing unemployment.  His rationale was that those actions would return what Keynes called "Aggregate Demand" back near to the level it had been before the recession.  I will define Aggregate Demand in the next article but to the lay person it is basically GDP.
EXAMPLE: 2009 STIMULUSOn January 8th, 2009 the Congressional Budget Office (CBO) made this dire announcement:
In the absence of any changes in policy…[t]he unemployment rate is forecast to rise above 9 percent by early next year.
CBO Jan 8, 2009 Outlook, Source
The next month America enacted a second stimulus bill that would eventually come to $831B.  That brought the 2009 economic stimulus in total to almost $4 trillion.  The rationale was to fill in the gap in aggregate demand and bring the economy back up to its normal, pre-recession level.  To the left is the CBO’s graph which will help make this clear.  I have shaded in red what Keynes called for fixing in his theories.  He considered this to be the recessionary gap government spending must fill in.

So fill this gap in we did!  The combined fiscal & monetary stimulus in 2009 totaled $3.8 trillion dollars!! (see below) (Sources: 1, 2, 3,4, 5, 6, 7) 
2009 Economic Stimulus; Click here to enlarge

Now, remember that CBO projection (quoted above Figure 12) that without stimulus unemployment would rise above 9% in 2010?  Guess what happened WITH stimulus?  Unemployment averaged 9.3% for the year. Now the CBO announcement quoted above really referred to the fact 2010 unemployment would go above 9% unless stimulus was applied.  WITH stimulus the 2010 unemployment ended up at 9.63% for the year. The stimulus had no effect at all on unemployment; we got the same unemployment as was projected without stimulus. 
What about GDP though?  Let's look again at the CBO projection from 1/8/2009 of what would happen to GDP without stimulus.  You will see it below.  Next to it is a graph of the actual GDP we got with stimulus; the only difference between the graphs was to save time I didn't inflation adjust every month and just graphed the year end total for each year.  
Take a look at the economy we were going to have without Keynesian stimulus on the left side.  Now look on the right side.  Guess what happened WITH stimulus?  In the same way the stimulus failed to reduce unemployment it also failed to improve GDP or fill in the "recessionary gap".  This is what it looks like to lay eyes on the failure that is Keynesian economics:
SHOW US THE MONEYKeynes' theories have been very widely adopted, however, nowhere have they worked:
  • It didn't work for Roosevelt for the entire 1930s.  
  • It didn't work for Japan in the 1990s.  
  • It didn't work for George Bush in 2007.  
  • It didn't work for Barack Obama in 2008.  
There is no instance where the widespread application of Keynesian economics has ever worked.
However, all that extra debt caused by government spending does cause long term harm to the economy.  That is why America has yet to experience a recovery.  The only guaranteed effect we have is a higher national debt and lower economic growth.

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