PrintThe Keynesian Dead End
A great editorial in the Wall Street Journal that pronounces stimulus efforts a "dead end" and that the western governments must get their fiscal house in order:
Like many bad ideas, the current Keynesian revival began under George W. Bush. Larry Summers, then a private economist, told Congress that a "timely, targeted and temporary" spending program of $150 billion was urgently needed to boost consumer "demand." Democrats who had retaken Congress adopted the idea-they love an excuse to spend-and the politically tapped-out Mr. Bush went along with $168 billion in spending and one-time tax rebates.
Seventeen months later, and despite historically easy monetary policy for that entire period, the jobless rate is still 9.7%. Yesterday, the Bureau of Economic Analysis once again reduced the GDP estimate for first quarter growth, this time to 2.7%, while economic indicators in the second quarter have been mediocre. As the nearby table shows, this is a far cry from the snappy recovery that typically follows a steep recession, most recently in 1983-84 after the Reagan tax cuts.
Those Reagan tax cuts led to 1st quarter growth in 1983 of 5.1%, 2nd quarter - 9.3%, 3rd quarter - 8.1%, and 4th quarter growth of 8.5%.
Which do you think was the better "stimulus?"
But like a drunk waking up from a hangover, Obama thinks more of the "hair of the dog" will turn the trick and cure what ails us:
The difference this time is that the Keynesian political consensus is cracking up. In Europe, the bond vigilantes have pulled the credit cards of Greece, Portugal and Spain, with Britain and Italy in their sights. Policy makers are now making a 180-degree turn from their own stimulus blowouts to cut spending and raise taxes. The austerity budget offered this month by the new British government is typical of Europe's new consensus.To put it another way, Germany's Angela Merkel has won the bet she made in early 2009 by keeping her country's stimulus far more modest. We suspect Mr. Obama will find a political stonewall this weekend in Toronto when he pleads with his fellow leaders to join him again for a spending spree.
A sign of stupidity - or madness - is to continue to repeat mistakes. Obama's belief that if only we toss more money into the economy, recovery will pick up speed, is perhaps the epitome of Keynesian orthodoxy. And the benefit of Obama's plan is that he can always come back and say that it wasn't enough, that we need more stim money. This brings to mind Bullwinkle trying over and over to pull a rabbit out of his hat, only to fail miserably.
The Europeans will turn our president down flat. But I doubt whether the collective wisdom of the socialists will budge Obama in his belief that building up massive debt is the way to redeem the economy.
