Thursday, December 30, 2010

President Barack Obama and Speaker of the House Nancy Pelosi are Keynesians

President Barack Obama and Speaker of the House Nancy Pelosi are Keynesians. John Maynard Keynes encouraged deficit spending during economic downturns to increase aggregate demand. This is a hard theory to resist particularly for politicians who address every problem or potential problem with the same solution, to increase the power and size of the government. Keynes postulated that the multiplier effect would boost the economy. President Obama and Speaker Pelosi have stated many times that government money going to people who would immediately spend it was best, that is propensity to consume. So the candlestick maker gets some government money, and spends it promptly buying items from an Indian Chief, who promptly makes purchases from the baker, and on and on. The theory is that the economy grows.

Unbelievably, there is no consensus if President Franklin D. Roosevelt's New Deal Keynesian policies worked. Roosevelt took office March 4, 1933, and five years later the country still had 15% unemployment. Prior to the Great Depression, the U.S. economy suffered numerous financial panics and recessions. Despite little Federal Government intervention, the economy bounced back more quickly. So many economists believe that Roosevelt's Keynesian policies prolonged the Depression and delayed recovery.

More recently, Japan embraced Keynesian policies, primarily “investing” in infrastructure. A 2.4% budget surplus in 1991 turned into a deficit of 4.3% by 1996 and 10% by 1998, with the national debt to GDP ratio reaching over 200%. The Keynesian policies did not work and the two decade period is referred to as Japan’s lost decade.

Of course, if Keynesian theory worked, the government really does have to make payments, it could just drop money from helicopters and the economy would grow. Or the government could hire half the unemployed to dig ditches and then hire the other half to fill the ditches back up. The formerly unemployed having a high propensity to spend would then have the candlestick maker, Indian Chief, and baker’s businesses booming. If Keynesian theory worked, Zimbabwe would be a wealthy country.

During the 1930s depression, President Herbert Hoover and Roosevelt kept on increasing tax rates. Roosevelt kept on increasing regulations. Without certainty and a stable tax and regulatory environment, businesses cannot plan and determine which business expansions or new business enterprises will pencil out. President Obama and Speaker Pelosi have continued these practices. Imagine you have a business idea, and are using a spreadsheet to forecast your projected revenue and expenses. What do you put down as your expenses for taxes, health care costs, and thanks to proposed cap and trade legislation, energy costs?

The Bush tax cuts have been in place for nearly a decade. Some progressives have referred to this as Bush Tax Cuts for the Rich. However, President Obama said in his December 7, 2010 press conference "A typical working family faced a tax increase of over $3,000 on January 1st".

Congress and President Obama have agreed to extend the Bush tax cuts for two years. Hopefully, the Keynesian policies are at an end, and the government has now provided some certainty to taxpayers so entrepreneurs can consider expanding their current business or to start a new business. Let's hope so.

Yours truly,

Gene Felder

Labels: , ,


Post a Comment

<< Home