The Failure of Keynesian Economics Explained

“We’re all Keynesians, now!” This semi-famous line was uttered by President Nixon in the early 1970’s as he implemented price controls across much of the economy. We all know how the 1970’s turned out.

Of course, “History repeats itself, the second time as farce” is where we are today (uttered by another failed politically-motivated economic theorist, Karl Marx). Late in the George W. Bush administration and throughout the Obama Administration, “Keynesian” dogma has ruled not only the Executive Branch, but at the Federal Reserve as well (The Fed being run by a man who once said that he would drop money from helicopters if he needed to keep the economy flush with money). We can all see how this decade will turn out, too.

Just to be clear, I have never been, am not now, nor will ever be a Keynesian, at least as described by today’s political economists – who are disingenuous as to what Keynes really advocated.

First, some fundamental economics – Simply put, the economy can be described by the following equation:

GDP = C + I + G + (X-M)

C-Consumption, I-investment, G-Gov’t spending, X-Exports, M-Imports

This equation is a good one; is absolutely correct; and most entry-level economics courses spend a lot of time focused on it.

This relationship between the components of GDP led Keynes to recommend that government act as a “counter-cyclical force” during the business cycle. That is, when C & I are high, G can be low and can pull money out of the economy through increased taxes. When C & I are low, G can be raised from the surplus and taxes can be lowered.

Keynes, however, did not advocate using “D-Deficit spending”. “D-Deficit spending” is not in the GDP equation (although it can be substituted into the equation as a part of Consumption, Investment or Government – but then the equation becomes recursive and is no longer linear which really fouls up macroeconomic regression analysis, but I digress).

To reiterate, Keynes believed that Government should act as a “counter-cyclical force”. When times are good, government should raise taxes to build a surplus. When times are bad, government should spend the surplus and lower taxes.

And this point is exactly where Keynes failed, miserably. His fundamental theory implies that people will behave in a way that people do not behave.

When has anyone ever seen a politician not spend available money in good or bad times? When has anyone seen a politician recommend raising taxes during a time of economic surplus? No one ever has. Keynes was a dreamer when it came to human nature. Keynesian economics fails to deal with people as they are.

Government cannot and will not ever act as a counter-cyclical force because politicians will pander, and special interests will grab. The political economists know all of this, of course. Their interests are driven by their own personal political objectives – wealth redistribution, policy selection (e.g. green jobs), or their own personal power.

As a result of the global mis-use of Keynesian theory, Greece continues to be a problem 12 months after it was “solved”, and the US economy is “underperforming” according to none other than Ben Bernanke, whose helicopter cash drop has been unsuccessful (He made the stock market bounce, he could not make it fly.).

Some might argue that the Bernanke Bounce was a good thing. It kept the US economy from going into a great depression. This theory is untestable. Unlike, for example, the elementary chemistry equation to calculate the number of molecules in specific volume of gas, we can’t run multiple experiments to prove or disprove economic actions and reactions. We can only look to historical events and try to assign parallels.

For instance, I can point out that in the early 1920’s, the US economy collapsed as badly as at the start of the Great Depression. The government allowed the markets to reset at lower prices; banks failed; people lost their jobs. Eighteen months later, the roaring twenties were under way. Which is worse – a decade of 10% unemployment or 18 months of 20% unemployment? If we had taken the latter course, our economy would be roaring now. Instead, industrial production is declining, and Delaware’s employment is stagnant.
I am no “Keynesian” because I understand human nature and politician’s nature. My faith is in competitive markets. If we really want the economy to come roaring back, the President, the Congress, the Governor, and the General Assembly need to take a breather. Give broad approval to most permit applications in the funnel to get private sector economic projects moving. Reduce the size of government through attrition and retirement incentives. And, lastly, call off the regulators.

To get people to risk their capital, risk their livelihoods, and risk their retirement, they need to know that the rules are stable – that they won’t get unnecessarily sued, taxed, regulated… Yes, there are risks. There are always risks. What we have chosen is to try to eliminate all risk, which has eliminated our economy. That, I think, is a bad choice.

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About the Contributor

Charlie Copeland

Charlie Copeland

Charlie Copeland is President of Associates International, Inc, an internationally-recognized direct marketing company located in Wilmington, Delaware. From 2002 through 2008, Charlie served as a Delaware State Senator and Senate Minority Leader where he was a leading voice for government accountability, education reform, and criminal justice reform. He is the primary founder of The Delaware Academy of Public Safety & Security, a homeland security, college-preparatory public Charter School and is involved in numerous other non-profit & community based organizations.