Why Liberals Love Keynesian EconomicsJune 21st, 2011 by Lee Eldridge
I was visiting with a relative a few years ago. He was a self-described liberal at the time. I asked him what he believed the primary function of government should be. His response: “The redistribution of wealth.”
Do you know a single liberal who would not advocate for increasing taxes on the rich?
I am a fiscal conservative and a social liberal. A man without a party. I have many friends who consider themselves to be liberals, meaning that they’re fiscally liberal as well as socially liberal, though most of them would probably not make a differentiation between the two. Some of them are environmentalists. Some advocate for women’s rights. Others focus on gay rights, or education, or poverty, or minority rights, or health care. These are all issues I have a great deal of compassion for. But the tie that binds liberals is the belief that we should raise taxes on the rich in order to expand government programs to fix social issues. Redistribution of wealth.
So how does this relate to Keynesian Economics?
I wrote two articles about Keynesian Economics back in March (Keynesian Economics Insufficient and The Stimulus and the CBO). I won’t rehash what we’ve already covered, but there is a core belief among Keynesians that is relevant to this discussion. Keynesians believe that for every dollar that is spent by the government, GDP will increase by more than a dollar. They call it a multiplier effect. Keynesian Economists have developed a series of formulas and multipliers they use to predict the growth of GDP from government expenditures. The government can “spend” money in many different ways, and these economists assign different multiplier values to each of these. And these economists believe that as GDP increases, jobs are created. They have a formula for that, too. So using these multipliers and formulas, they can predict the number of jobs that will be created as the government spends more money. (This is how the CBO has concluded that the Obama stimulus created jobs despite all evidence to the contrary.)
Redistribution of wealth is a political agenda. Keynesian Economics is a view of economics that states that when the government spends money, GDP rises, and jobs are created. It is my belief that many on the left gravitate to Keynesian Economics for just this reason. When you can justify endless government expenditures under the belief that we can solve our social issues while improving the economy, then what possible reason could there be to limit the growth of government? All we have to do is continue to raise taxes on the rich, increase funding to government programs, and we solve our problems. If you read Paul Krugman, the economist and writer for the New York Times, this is certainly what he has advocated for years.
Well, the problem is that Keynesian Economics has been found lacking. The expansion in the federal government did not create jobs, and did not fix the economy.
The Obama Stimulus
So does that mean that the Obama stimulus plan failed? If your measurement is what we were told by its supporters before the bill was passed, then yes, the stimulus failed. The economy has continued to struggle, and unemployment has far surpassed the administration’s original predictions.
But it would be a huge oversimplification to blame the stimulus for the current condition of the economy. In many ways, it would be just as dishonest as the Keynesians who continue to say that the stimulus created millions of jobs and kept us from a depression. The stimulus does not live in a vacuum. And to pretend that it does is illogical at best, and dishonest by those who should know better.
There is a larger narrative here. The stimulus bill was flawed, but certainly contained some tax cuts and business incentives that many would agree are good for the economy. And there’s a case to be made that under certain conditions, some government expenditures do benefit the economy. But the larger issue is that for everything that was done right, and there were a few, there were many more that were done wrong that have stifled economic growth. Unprecedented federal deficits and a huge expansion of the federal debt. The looming threat of increasing tax rates. An incoherent energy policy. The implementation of ObamaCare. New federal regulations, many from the EPA and the banking reforms, that will cost businesses billions of dollars to implement. The projected growth and insolvency of entitlement programs including social security, Medicare and Medicaid. Unfunded liabilities to government employee pension plans. The list goes on and on. The administration has earned its reputation of being unfriendly to the business community. And the business community has responded by running for cover.
So did the stimulus fail? What if the stimulus had been accompanied by reductions in needless regulations, permanent reductions in tax rates and real tax reform, a free market approach to health care reform, entitlement reform, a legitimate plan to tackle our debts and deficits, and fiscal discipline from Congress? Do you believe that our economy would be better off today? Worse? The answer to that question is what separates fiscal conservatives from fiscal liberals.
A Final Note
Dishonesty is a primary reason that I don’t like most politicians and members of the media. I continue to hear from the administration how the stimulus kept us from a depression, despite a complete lack of evidence to support their conclusion. Nobody was predicting a depression before the stimulus bill was passed. And it’s revisionist history now to say that we would have gone into a depression without the bill. Here’s an article from IBD that explains how the data shows that the recession had already leveled off BEFORE the stimulus bill went into effect. Here’s a short piece from the article:
The conclusion is that in claiming to have staved off a Depression, the White House and its supporters seem to be engaging in a bit of historical revisionism.
Economists weren’t predicting a Depression.
White House economists forecast in January 2009 that, even without a stimulus, unemployment would top out at just 8.8% — well below the 10.8% peak during the 1981-82 recession, and nowhere near Depression-era unemployment levels.
The same month, the Congressional Budget Office predicted that, absent any stimulus, the recession would end in “the second half of 2009.” The recession officially ended in June 2009, suggesting that the stimulus did not have anything to do with it.