Keynesian Economics: The Brief and Unfortunate History of a Moribund Theory

Economists frequently complain that, unlike other sciences, society's management of its scarce resources allows no opportunity for realistic experimentation. The image of ambitious legislators, endowed with greater amounts of political acumen than economic expertise, donning lab coats and safety goggles, and reaching for the test tubes of government intervention ought to incite animosity in the American public. Frustrations aside, hopefully the results of the tube labeled "Keynesian Economics" will finally bury the erratic and inconsistent theories of deficit spending, public works, and central economic planning once and for all. Hopefully.

But exactly how many generations of Americans will be exposed to the toxicity of these particular experiments before Scientist Sam finally chucks them in the wastebasket? Historically, the advice of John Maynard Keynes has been less economic panacea than medical malpractice. Keynes denounced neoclassical economic models by denying the ability of competitive markets to maximize a system's employment. By 1939, a decade of adherence to Keynesian suggestions and unbridled government spending had left 17% of Americans unemployed. George Will notes that "America's greatest industrial collapse occurred in 1937, eight years into the great depression and nearly five years into the New Deal." 

In fact, most experts now agree that New Deal policies actually delayed economic recovery. The cause of the failures of deficit spending as a macroeconomic remedy can be found in the concept of Ricardian equivalence, which posits that investments made despite a budget deficit delay an inevitable tax increase, or, more simply, identifies the choice of taxing entities as "tax now" and "tax later". Consumers realize that a budget deficit in excess of one trillion dollars is ultimately unsustainable and perceive (accurately) the ephemeral nature of temporary tax relief. Hence, the greatest immediate stimulative effect would perhaps be achieved by cuts in government spending- positively altering taxation expectations of potential consumers. 

Upon the application Keynes' formula to America's current economic crisis, Princeton economist Alan Binder estimated that the Ameriphobic British proponent of eugenics (Our pal Jonathan in case you were wondering) would demand an economic stimulus in the amount of $650 billion. Nearly two hundred billion less than the actual legislation drafted and passed (exclusively) by House Democrats entails. If the overzealous Washington scientists do not have the common sense to abstain from an historically unsuccessful policy experiment which places an almost unbearable tax burden on future generations, perhaps they will have the decency to take note of the results.