Keynesians blame Austerity not Anti-Business Policies for Poor Economic Growth

Posted by PITHOCRATES - March 24th, 2013

Week in Review

Keynesian economics puts the government into the economy.  This is why politicians love Keynesian economics.  It sanctions government spending.  And government investments to help stimulate economic activity.  No matter how bad the investment is.  For Keynesians have argued that paying people to dig a ditch and to fill it back in with the dirt they just removed will have a positive effect on the economy.  Because these ditch-diggers will spend their earnings in the private sector economy.  Thus stimulating economic activity.  So pulling money out of the economy to pay people to dig worthless ditches has only a positive effect on the economy.

But it doesn’t.  For they don’t see the money in the private sector that people can no longer spend because it was taxed away from them to pay people to dig worthless ditches.  So at best it’s a wash.  But it is never ‘at best’.  Because before people spend their ditch-digging earnings it passes through many hands and many government departments.  All of which take a little off the top to cover their overhead costs.  So government spending is always less than what the private sector would have spent.  But Keynesians conveniently ignore this fact.  Because they like the validation they receive from the government.  And they know they will continue to receive that as long as they tell the government what they want to hear.  The government should spend more money (see WBI: More on the Chicken-and-Egg Deficit-and-Jobs Issue by Michael Tomasky posted 3/22/2013 on The Daily Beast).

Our first WBI [Wonky But Important] is built around a March 8 CBO report brought to my attention this morning by Congressman Chris van Hollen–my very own Mongtomery County Md. representative, I am happy to say–finding that half of this year’s expected budget deficit of around $800 billion–half!–can be laid at the door of the struggling economy.

In other words: When the economy is revved up, it reduces the deficit, because there are more tax revenues from all those employed people and businesses working to capacity (and, concomitantly, fewer government expenditures–there’s no need for stimulus spending or lots of unemployment benefits during a humming economy)…

CBO expects that the budgetary effects of automatic stabilizers will remain large because of the continued weakness in the economy, which is caused in part by the fiscal tightening that is occurring in calendar year 2013 under current law. That tightening includes the reduction in federal spending resulting from the sequestration that went into effect on March 1; the expiration of the payroll tax cut that was in place in 2011 and 2012; and the increase in tax rates on income above certain thresholds starting in 2013.

Can’t get much clearer than that. Austerity. Increases. The. Deficit. Asuterity. Increases. The. Deficit.

This relates to and supports the post I wrote Tuesday about that poll showing a horrifying percentage of Americans thinking balanced budgets lead to jobs. No. It’s the other way around. Now you have the CBO saying it, not just me. The Democrats, as van Hollen made clear at this breakfast I attended at Third Way, are banking on people to grasp this. I hope so.

It is amazing how Keynesians can filter through facts and figures and come to conclusions that always support their position.  Everything is always better when the government spends more money.  And nothing bad happens when government spends more money.  In fact only bad things happen when governments spend less money.  And they still believe this despite the European sovereign debt crisis.  Caused by governments spending too much money.

No Keynesian ever supported this position that prosperous economic times caused by government spending money during the Eighties would reduce the deficit.  That defense spending was nothing but bad.  Giving the government dangerous levels of debt.  But that was then.  Now that the Democrats are spending far greater sums than Ronald Reagan did and are running greater deficits than Reagan ever did deficits are now nothing to worry about.  Funny how that changed.

If today’s deficit spending is good than Reagan’s deficit spending was good.  If Reagan’s deficit spending was bad than today’s deficit spending is bad.  You can’t have it both ways.

If we can grow ourselves out of these deficits with expanding economic activity the question is how do we increase economic activity?  We need to let businesses do what they do without hindering them.  And how do we hinder business?  By increasing the cost of business.  And lowering the rate of return on investment.  Higher regulatory costs increase the cost of business.  Higher taxes lower rates of return on investment capital.  They pass these higher costs on to consumers via higher prices.  Which consumes more of their disposable income.  Reducing the amount of stuff they can buy.  Thus lowering business revenues.  All of which reduces economic activity.  It doesn’t increase it.

The reason why we are in the worse economic recovery since that following the Great Depression is the president’s economic policies.  More government spending won’t change that.  It’s not austerity that is increasing the deficit.  It’s the foolhardy policies of Keynesians who believe that government spending generates real economic activity.  It doesn’t.  It didn’t pull us out of the Great Depression.  It didn’t pull us out of the stagflation of the Seventies.  And it didn’t pull us out of the Great Recession.  But reversing anti-business policies did pull us out of the Great Depression.  It pulled us out of the stagflation of the Seventies.  And it would pull us out of the Great Recession.  If we would only try them.

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