Archive for the ‘Keynesian Theory of Economics’ Category


Friday, January 6th, 2012



Monday, November 14th, 2011
Published on The Weekly Standard (

What if government spending depresses instead of stimulates?

Charles Wolf Jr.

November 7, 2011, Vol. 17, No. 08

EXCERPT FROM THIS ARTICLE:  Keynes assumed that the initial deficient level of aggregate demand would remain unchanged until the stimulative (“pump-priming”) effect of additional government spending kicked in. In other words, increased government spending, or its anticipation, would not further diminish pre-existing levels of consumer demand and investment demand. However, Keynes’s failure to consider the possibility of an adverse effect from government spending​—​that it might lead to still further decay in the prior levels of consumption and investment​—​was a fundamental flaw in the theory.

It is generally recognized that the conceptual underpinnings for so-called stimulus programs lie in the theory developed by John Maynard Keynes in the 1930s. That the practical results of these programs in recent years have been negligible, if not negative, while their costs have been high, may be sufficient grounds for avoiding them in the future.

But what if the theory itself is flawed? For many economists, flawed theory would be a greater concern​—​surely more hurtful to professional pride​—​than ineffectual results from programs based on a valid theory. Moreover, it would mean no amount of effort to improve the design of stimulus programs is likely to help.

Before addressing questions about the theory, let’s briefly recap the costs and results of the stimulus so far.

Total stimulus costs have been high, but reckoning them accurately isn’t easy. They include $787 billion in federal spending that was legislated and appropriated in 2009 with the “stimulus” label attached to it. In addition, a proper accounting of the cost should include several other programs and outlays that, while not carrying the “stimulus” label, were designed to boost domestic spending or preclude reductions in spending that were otherwise expected to occur. These other programs include the following: TARP funding to relieve the impaired asset values and weakened balance sheets of financial institutions ($700 billion); bailout funds provided to support the auto industry ($17 billion); extension of unemployment benefits to support income and spending by unemployed workers ($34 billion); and temporary subsidies for the “cash for clunkers” program ($3 billion). (more…)



Monday, October 31st, 2011
The Wall Street Journal

  • OCTOBER 28, 2011

Concern over future tax rates is one of the main reasons for reduced investor confidence.

Those who heaped high praise on Keynesian policies have grown silent as government spending has failed to bring an economic recovery. Except for a few diehards who want still more government spending, and those who make the unverifiable claim that the economy would have collapsed without it, most now recognize that more than a trillion dollars of spending by the Bush and Obama administrations has left the economy in a slump and unemployment hovering above 9%.

Why is the economic response to increased government spending so different from the response predicted by Keynesian models? What is missing from the models that makes their forecasts so inaccurate? Those should be the questions asked by both proponents and opponents of more government spending. Allow me to suggest four major omissions from Keynesian models:

First, big increases in spending and government deficits raise the prospect of future tax increases. Many people understand that increased spending must be paid for sooner or later. Meanwhile, President Obama makes certain that many more will reach that conclusion by continuing to demand permanent tax increases. His demands are a deterrent for those who do most of the saving and investing. Concern over future tax rates is one of the main reasons for heightened uncertainty and reduced confidence. Potential investors hold cash and wait.




Wednesday, October 26th, 2011
Published on The Weekly Standard (

The global debt apocalypse approaches.

David M. Smick

October 31, 2011, Vol. 17, No. 07

On the issue of public debt, Washington is experiencing what psychologists call “learned helplessness.” The financial news is so relentlessly terrible that people have become numb to it and assume nothing can be done to regain control over our fate.

Today the world’s public and private debt exceeds an incredible 300 percent of GDP. We are at risk of succumbing to an ugly, downward, global mark-to-market in asset prices. Yet the discussion in Washington fails to reflect the immensity of the threat.

Some money managers have a theory that this mark-to-market process has been under way for some time. Stage One was the 1990s Asian crisis. Global financial markets concluded that Asia’s debt was dangerously high and its banks’ balance sheets not reflective of reality. Global traders pounced. Interest rates soared, equity markets plummeted, banks failed, and currencies collapsed.

Stage Two is happening in Europe today.

Stage Three will eventually hit the United States. Washington policy-makers seem confident America’s public debt risk is years away. They believe that the U.S. economy, with the dollar the reserve currency, enjoys some immunity from these concerns. The central bank, moreover, can buy bonds to keep interest rates from rising in response to growing debt. Yet these are risky assumptions. (more…)



Wednesday, October 12th, 2011
Published on The Weekly Standard (


Rumors of Barack Obama’s political skill have been greatly exaggerated.

Noemie Emery

October 10, 2011, Vol. 17, No. 04

EXCERPT FROM THIS ARTICLE:  What went wrong in the first place was that too much went right. He never was able to learn from adversity, as he never saw any. He never learned to build and maintain coalitions; they simply assembled around him. He never argued people around from different positions, he simply inspired them to vague aspirations. He never passed laws, much less tried to enforce them. His idea of leading was making a speech. Miraculous things seemed to happen around him: In his breakout run that made him a national figure, he faced opposition from candidates who were sidelined by scandals before he could face them. In the Democrats’ primaries, he emerged as the candidate from academia and of the liberal white upper classes, a tranche often doomed by its want of appeal to minorities. As a black academic, he won nonwhites over, and his coalition formed by itself. His governing theory was that he would make speeches and win people over; then Nancy Pelosi would twist arms, or break them. That worked for a while, until Pelosi lost power, and so did his speeches. As a result he now seems to have run out of options, and strategies. There was, it appears, no plan B.

For a success, Barack Obama is a very bad politician, the worst politician to win the presidency by an electoral landslide, to never lose a major election, or to rise to the presidency from a state legislature in little more than four years. He has gone from sterling campaigner to put-upon leader; from the new FDR to the next Jimmy Carter; from being the orator who could hold millions spellbound to the man who moves no one at all. The man who promised everything is delivering nothing. Journalists who wept when he won the election now grind their teeth in despair. Maureen Dowd admits he isn’t the one for whom even he had been waiting. The gap between sizzle and steak never seemed so large or alarming, and inquiring minds want to know what went wrong. (more…)



Saturday, October 8th, 2011
The Wall Street Journal

  • OCTOBER 3, 2011,

The political graveyards are full of politicians who thought that temporary, targeted economic policies would get them re-elected.

Mr. Cogan, a senior fellow at the Hoover Institution and a professor of public policy at Stanford University, served as deputy director of the Office of Management and Budget during the Reagan administration. Mr. Taylor, a professor of economics at Stanford and a senior fellow at the Hoover Institution, served as under secretary of the Treasury during the George W. Bush administration.

Temporary, targeted tax reductions and increases in government spending are not good economics. They have repeatedly failed to increase economic growth on a sustainable basis. What may come as a surprise is that such policies are not good politics either. Their inability to deliver promised economic benefits has invariably led disappointed voters to turn against those politicians, Democratic and Republican, who have supported them.

Consider the evidence. When President Gerald Ford entered office, the economy was in the midst of the serious 1974-75 recession. Responding to the popular clamor to “do something,” he proposed a short-term stimulus plan in early 1975. The centerpiece was a temporary income-tax rebate. Congress added a one-time, $50 increase in Social Security benefits and, to bolster the sagging housing market, a one-time tax credit for new home buyers.

The rebate caused only a temporary blip in consumer spending. Economic growth rose to 9% in the first quarter of 1976 but then dropped to only 2% in the third quarter, and unemployment started rising. (more…)



Wednesday, October 5th, 2011


Victor Davis Hanson

October 4, 2011

Ten Lessons from Obama
In less than three years Barack Obama has reversed all expectations.

The election of Barack Obama brought all sorts of contradictions. A man with about the least prior executive experience in presidential history was suddenly acclaimed a “god” and the smartest man ever to assume the office.

Most important, a number of critical changes were heralded that would help address the supposed disasters of the Bush administration: a new “reset” foreign policy, a Keynesian economic miracle, a commitment to “millions of green jobs,” and a promise to end politics as usual, specifically the hardball divisive rancor of the past. Obamism, in short, was not a mere change in administration, but a religion.

In less than three years, however, the Obama administration has established a far different legacy from the one it promised, and the lessons of 2009–2011 will be with us for a long time:

1. The type and nature of a presidential candidate’s prior experience will be examined as never before. Obama’s two years in the U.S. Senate are now universally seen as insufficient preparation. The result will be more emphasis on executive experience and far longer tenure. Fairly or not, the Obama legacy hangs over the possible presidential aspirations of everyone from a Chris Christie or Marco Rubio to a Sarah Palin or Herman Cain. (more…)



Thursday, September 22nd, 2011
The Wall Street Journal

  • SEPTEMBER 21, 2011

Barney Frank’s Fed Packing Plan

A proposal to punish the hard-money regional bank presidents.

  • Among Washington’s modern ironies is that liberals think a Federal Reserve that is increasingly a creature of the White House and Congress has too much independence. So along comes Barney Frank with a plan to make the central bank even more political than it already is, in particular by cutting out its regional presidents and replacing their votes with political appointees.
In a remarkable white paper released last week, the former Chairman and now ranking member of the House Financial Services Committee targets the role of the 12 regional bank presidents. Today the presidents are allotted (on a rotating basis) four of the 12 voting slots on the Fed’s Open Market Committee, or FOMC, which sets monetary policy. The other eight are the president of the Federal Reserve Bank of New York and the seven Fed Governors, who are appointed by the President and confirmed by the Senate. Mr. Frank wants to strip the regional banks of any voting membership.

The 12 presidents are selected by regional bank boards, and Mr. Frank writes that this “anomaly” is “not simply an imperfection in our model of government based on public accountability” but influences “in a systematic way the decisions of the Federal Reserve.” That would seem to be the point, though what Mr. Frank means is that the regional presidents have historically tended to favor sound money and thus have “now become a significant constraint on national economic policy making.”

The Congressman’s timing is especially notable, coming only days before the latest two-day FOMC meeting that ends today. One plausible inference is that Barney is walking point for White House political advisers who want to intimidate the Fed presidents from sticking to a harder-money policy but can’t say so themselves. He’s certainly in line with the latest consensus among liberal economists, who are urging a burst of inflation to reduce U.S. debt and pump up the economy before Election Day.


ReutersU.S. House Financial Services Committee Ranking Member Representative Barney Frank




Wednesday, September 14th, 2011
The Wall Street Journal

  • SEPTEMBER 12, 2011

The tragedy of the failed stimulus is felt hard in minority communities. There’s a better way.

Some people actually believe government can create jobs by taxing and borrowing from people with jobs and then giving that money to people without jobs. They call this demand stimulus. To make matters worse, other people think these demand-stimulus ideas warrant a serious response.

Government taxes cigarettes to stop people from smoking, not to get them to smoke. Government fines speeders so they won’t speed, not to encourage them to drive faster. And yet contrary to common sense, it seems perfectly natural to some people that government would tax people who work or companies that are successful only to give that money to people who don’t work and to bail out losing companies. The thought never crosses their minds that these policies are the very reason why our economy is in such bad shape.

I’m beginning to think that Irving Kristol was correct when he wrote, “It takes a Ph.D. in economics not to be able to understand the obvious.” It shouldn’t surprise anyone why the economy isn’t getting better.

If the U.S. wants prosperity, government doesn’t need to do something, it needs to undo much of what it already has done. Here is one area where, in the spirit of the late Congressman Jack Kemp, President Obama and I could agree.

African-Americans are suffering inordinately in the Obama aftermath of the Bush Great Recession. While overall U.S. unemployment stands at 9.1%, black unemployment has jumped to 16.7%. Black teenage unemployment is bordering on 50%, and that figure doesn’t even take into account “discouraged” workers, “involuntary” part-time workers and “underemployed” workers. But even these numbers don’t tell the real story. They represent real people who are suffering deeply and have been suffering for a long, long time. (more…)



Sunday, September 11th, 2011

> President and his followers intend to end America’s greatness
> By Jeffrey T. Kuhner
> The Washington Times  > Thursday, September 8, 2011
> President Obama is politically insane. This is the real meaning of his speech Thursday night in front of a joint session of Congress. Albert Einstein defined insanity as doing the same thing over and over, expecting a different result. By that definition, Mr. Obama is a lunatic leftist.
> Much of his speech called for more of the same – government activism; massive spending on infrastructure, bridges and roads; extending the payroll tax cut; and more public aid to states and municipalities. In short, he seeks to perpetuate the dismal policies of Obamanomics. He is a reckless ideologue masquerading as a pragmatist.
> Mr. Obama’s presidency has been dominated by one seminal reality – failure. His nearly $1 trillion stimulus; record budget deficits; unprecedented levels of public spending; the government bailouts of the auto, insurance, housing and banking sectors; billions heaped on “green jobs”; Obamacare; Dodd-Frank to reform Wall Street, and huge outlays for food stamps and unemployment benefits – all have failed to restore the economy.
> In fact, they have done the opposite. Unemployment is 9.1 percent. Growth is anemic. In August, no new net jobs – none – were created. Consumer confidence is low. Inflation is rising. The value of the dollar plummets. Burdensome regulations are strangling business. America is being buried under a mountain of debt. For the first time in history, its credit rating has been downgraded. The country is not only on the verge of national bankruptcy, but of economic collapse.
> Any reasonable person would change course – but not Mr. Obama. He is a big-government liberal who worships at the altar of statism. The fact that we are broke and can no longer afford his borrow-and-spend policies means nothing. Like all fanatics, he is disconnected from reality. (more…)

Search All Posts