The Breaking Point and Death of Keynes
The comments above & below is an edited and abridged synopsis of an article by Lance Roberts
For the last 30 years, each administration, along with the Federal Reserve, has continued to operate under Keynesian monetary and fiscal policies, believing the model worked. The reality has been that most of the aggregate growth in the economy has been financed by deficit spending, credit expansion and a reduction in savings. This reduced productive investment in the economy, and output slowed. As wages fell the consumer was forced to take on more leverage, which decreased savings. As a result of the increased leverage, more income was needed to service the debt.
Most government spending programs redistribute income from workers to the unemployed. This, Keynesians argue, increases the welfare of those hurt by the recession. What their models ignore is the reduced productivity that follows a shift of resources toward redistribution and away from productive investment.
These issues have weighed on the overall prosperity of the economy. Most telling is the inability of current economists to realize the problem of trying to cure a debt problem with more debt.
This is why previous policies (cash for clunkers, quantitative easing) have failed: Each intervention either dragged future consumption forward or stimulated asset markets. Dragging future consumption forward leaves a void in the future that has to be continually filled, and creating an artificial wealth effect decreases savings that could (and should) have been used for productive investment.
The Keynesian view that more money in people’s pockets will drive up consumer spending, with a boost to GDP being the end result, has been clearly wrong. It hasn’t happened in 30 years.
The Keynesian model died in 1980. It’s time for those driving both monetary and fiscal policy to wake up and smell the burning dollar. We are at war with ourselves, and the games being played out by Washington to maintain the status quo are slowing creating the next crisis that won’t be fixed with another monetary bailout.