Robert Reich's Misguided Love for Keynesian Economic Solutions

by: Chuck Young

Robert Reich, professor at the University of California at Berkeley and former labor secretary under President Bill Clinton has gone completely mad.

Mr. Reich wrote on his blog Friday that he thinks more Keynesian economic policy actions are needed to rescue the economy.

{…} For three decades, starting in the late 1970s, the biggest economic problem America faced on an ongoing basis was inflation. Demand always seemed to be on the verge of outrunning the productive capacity of the nation. The Fed had to be ready to raise interest rates to stop the party, as it did on several occasions.

During this era of inflation economics, it appeared that John Maynard Keynes – and his Depression-era concern about chronically inadequate demand — was dead. So-called “supply siders” told policy makers that if they cut taxes on corporations and the wealthy, they’d unleash a torrent of investment and innovation – thereby increasing the productive capacity of the nation. The benefits would trickle down to everyone else.

But the pendulum may now be swinging back to the earlier era in which demand always seems on the verge of trailing the nation’s productive capacity. The biggest ongoing threats are chronic recession or even deflation, because consumers don’t have enough money to what the economy is capable of selling at full or near-full employment. Despite gains in productivity, little has trickled down to America’s middle class. {…}

{…} Keynes prescribed two remedies – both of which are now necessary: Government spending to “prime the pump” and get businesses to invest and hire once again. And, as Keynes wrote, “measures for the redistribution of incomes in a way likely to raise the propensity to consume.” Translated: Instead of big tax cuts for corporations and the rich, tax cuts and income supplements for the middle class. (Source: Robert Reich Blog)

For those unfamiliar with Keynesian economics it is at its core a principal of big government spending in order to make up for inefficiencies in the private sector. In other words, spend lots of money to goose the economy. The name Keynesian comes from the British economist John Maynard Keynes.

The problem with the Keynesian concept is that it only makes the macro conditions worse by creating an economy that is dependent on government stimulus to stay afloat, while at the same time creates massive deficits that become unmanageable such as what we have now.

It has been said countless times, especially during presidential campaigns, that the nation will pass down its debt to our children and grandchildren. This is no longer true, it is the current generation that is burdened with the debt of the nation. Mr. Reich advocates more government spending to ‘prime the pump’ as he calls it. But Mr. Reich, the pump is clogged with debt and only adding more debt will eventually kill the machine entirely when the United States goes so far into debt that it jeopardizes the creditworthiness of the nation.

More government spending in hopes it can buy its way out of poverty is foolish and dangerous. I contend that policy decisions over the past few decades were all forms of Keynesian economic theory. The relaxation of leverage rules allowing for banks and other financial institutions, the repeal of the Glass-Steagall act, the drive to make home ownership available to anyone by looking the other way when mortgage fraud was running rampant. These few examples are all part of a Keynesian mindset, which is to make money easier to get… to keep the pump primed, again using your words.

But where did that get us Mr. Reich? the ‘pump’ got so jammed up with debt that it seized up and the economy came to a screeching halt. The solution can not be more of the same policies that led to the disaster. The solution is to remove the debt that which is clogging the pump. That would mean more hardship for the economy as banks, big business, and governments alike take their losses and wipe the slate clean, essentially starting over but this time at levels that the private sector ‘pump’ can run on its own. Keynesian economics is like bad motor oil, it may loosen things up for a while, but over time that oil turns into sludge and it must be dealt with.

Mr. Reich, we agree that the nation is and will be in a recessionary environment for a very long time, but we are at opposite ends of the planet on how to remedy it. I want a solution that fosters organic and sustainable growth, your solution of more of the same is akin to injecting RedBull and caffeine into the veins of the economy to speed it up. But you know what happens to people when they drink RedBull? They usually come crashing down after the effects wear off.

The economy of the United States, and many other nations have now seen what a Keynesian policy does, the hard way. And the idea of just continuing the “same as before” policy will destroy the nation in the end.

Disclosure: No position