Sunday, May 27, 2012

Failed Stimulus Programs and Keynes

Stimulus Spending Keeps Failing says a lot about government policy and too many politicians' efforts to ignore the lessons of history.

Keynesian based demand stimulus programs consistently fail to work when improperly applied to structural debt problems. Yet when times get tough, governments keep using this insane demand stimulation approach of doing the same things over and over and expecting different results. When enough time lapses, the debt becomes unsustainable, the situation that exists today.

Passing out "free" money is something politicians enjoy doing, even though it's not free at all. In fact, piling new debt on top of old debt is actually very expensive.

Of course, spending borrowed OPM is politically popular and sometimes even works---temporarily. But in the long run, stimulus programs and government pump priming only increase debt and annual deficits. And this approach never ends well.

Yet politicians vote to "can kick" and send future taxpayers the bill. They increase current government spending instead of asking current taxpayers to fund the proposed expenditures by agreeing to pay higher taxes.

It's the buy now, pay later and then tax forever scenario. As we all know, however, getting something for nothing doesn't work out over time.

Here's what the above referenced article says:

"The weak economic recovery in the U.S. and the even weaker performance in much of Europe have renewed calls for ending budget austerity and returning to larger fiscal deficits. Curiously, this plea for more fiscal expansion fails to offer any proof that Organization for Economic Cooperation and Development (OECD) countries that chose more budget stimulus have performed better than those that opted for more austerity. Similarly, in the American context, no evidence is offered that past U.S. budget deficits (averaging 9% of GDP between 2009 and 2011) helped to promote the economic recovery. . . .

The OECD countries most clearly in or near renewed recession—Greece, Portugal, Italy, Spain and perhaps Ireland and the Netherlands—are among those with relatively large fiscal deficits. The median of fiscal deficits for these six countries for 2010 and 2011 was 7.9% of GDP. Of course, part of this pattern reflects a positive effect of weak economic growth on deficits, rather than the reverse.

But there is nothing in the overall OECD data since 2009 that supports the Keynesian view that fiscal expansion has promoted economic growth. . . .

Yet many Keynesian economists look at the weak U.S. recovery and conclude that the problem was that the government lacked sufficient commitment to fiscal expansion; it should have been even larger and pursued over an extended period.
This viewpoint is dangerously unstable. Every time heightened fiscal deficits fail to produce desirable outcomes, the policy advice is to choose still larger deficits. . . . the results from following this policy advice are persistently low economic growth and an exploding ratio of public debt to GDP. . . .

Despite the lack of evidence, it is remarkable how much allegiance the Keynesian approach receives from policy makers and economists. I think it's because the Keynesian model addresses important macroeconomic policy issues and is pedagogically beautiful, no doubt reflecting the genius of Keynes. The basic model—government steps in to spend when others won't—can be presented readily to one's mother, who is then likely to buy the conclusions. . . .

Looking forward, there is a lot to say on economic grounds for strengthening fiscal austerity in OECD countries. From a political perspective, however, the movement toward austerity may be difficult to sustain in some countries, notably in France and Greece where leftists and other anti-austerity groups just won elections.

Consequently, there is likely to be increasing diversity across countries in fiscal policies, and this divergence will likely make it increasingly hard to sustain the euro as a common currency. On the plus side, the differing policies will provide better data to analyze the economic consequences of austerity."

Summing Up

Keynesianism as practiced today is dangerous to any country's future economic health and well being, including our own.

Piling debt on top of debt is not a winning formula.

We can't forever consume what we don't produce, and eventually we'll have to pay for what we consume--with interest.

Short term sugar highs are not an ingredient of long term success.

And these short term sugar highs are exactly what stimulus programs represent.

More dangerous perhaps, they have proved to be a politically popular way to increase the size of the government.

But most dangerous, over time these stimulative sugar highs work to impede economic growth.

So now it's nigh payback time.

The reason is simple---we've been doing the wrong thing for far too long by following the sugar high stimulus programs as taught by Keynes.

The hole is now dug and it's a deep one.

Stimulating demand by borrowing is apparently the only play in the progressives' playbook, and it's a loser economically.

Someday, and hopefully soon, it will be a loser politically, too.

Thanks. Bob.