Why Liberals Love Keynesian Economics

June 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.

John Maynard KeynesSo 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.

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5 Responses to “Why Liberals Love Keynesian Economics”

  1. James Says:

    Now the Republicans are in and you’ll see what happens when the Republicans take on a tanking economy. It really tanks. The Democrats were able to stop the spiralling clusterbang started because of the massive deregulation of the financial markets by the Bush Administration, and now you’ll see the Republicans finish killing the economy. I’m a Democrat and I’m glad the economy is in shambles. The Democrats averted a Depression, and now the Republicans are taking over and will create one. That’ll leave a sour taste in all the independents mouth’s for a very long time thus forcing them to vote Democrat for years to come. So, I see it as a win for the Democrat party that the Republicans are taking over a bad economy they screwed up to begin with :) . Massive win for the Democrats. Just watch

  2. Lee Eldridge Says:

    Hello James. Thank you for your note.

    I do a lot of reading on business, economics and the financial markets. I can find nothing that suggests that the dems averted a depression with their Keynesian actions these last couple of years. They weren’t predicting a depression. Economists weren’t predicting a depression. Nothing in the data shows that we were headed toward a depression. It’s only hindsight / revisionist history that can be used to make such a claim and an overwhelming (illogical) belief that the stimulus, QE1 and QE2 (Keynesian policies) created millions of jobs, and without these policies, our economy would have lost millions more jobs than we already lost. Once again, nothing in the data suggests that this is accurate other than the fact that fiscal liberals WANT to believe that it’s true.

    I loathe to defend republicans, and they’re certainly partially responsible for the mess. But deregulation was only one factor in this most recent recession. The housing bubble has been at the center of the last two recessions, and it was policies created during the Clinton era, and continued in the Bush era, that directly created the housing bubble. Lots of blame to go around to the dems, the GOP, and the banks.

  3. Hoyt Brown Says:

    James your head is so far up your rear end, you can no longer think, that is if you ever had a thought in the first place. It is people like you who have no clue as to what is going on or has gone on in the past that will toast this country. Do your self a favor and next time before you open your mouth do some reading and find out a few things. Take what I write below as a starter.
    A little history the day the democrats took over was not January 22nd
    2009 it was actually January 3rd 2007 the day the Democrats took over
    the House of Representatives and the Senate, the start of the 110th Congress.
    The Democratic Party controlled a majority in both chambers for the first
    time since the end of the 103rd Congress in 1995.
    For those who are listening to the liberals propagating the fallacy that
    everything is “Bush’s Fault”, think about this:
    January 3rd, 2007 was the day the Democrats took over the Senate
    and the Congress:
    At the time: The DOW Jones closed at 12,621.77
    The GDP for the previous quarter was 3.5%
    The Unemployment rate was 4.6%
    George Bush’s Economic policies SET A RECORD of 52
    STRAIGHT MONTHS of JOB CREATION!
    Remember the day… January 3rd, 2007 was the day
    that Barney Frank took over the House Financial Services Committee
    and Chris Dodd took over the Senate Banking Committee.
    The economic meltdown that happened 15 months later was in what part
    of the economy?
    BANKING AND FINANCIAL SERVICES!
    Thank Congress for taking us from 13,000 DOW, 3.5 GDP
    and 4.6% Unemployment to this CRISIS by dumping 5-6 TRILLION
    Dollars of toxic loans on the economy from YOUR Fannie Mae
    and Freddie Mac fiasco’s!
    Bush asked Congress 17 TIMES to stop Fannie & Freddie – starting in 2001, because it was financially risky for the U.S. economy, but no one was listening).
    And who took the THIRD highest pay-off from Fannie Mae AND Freddie Mac?
    OBAMA. And who fought against reform of Fannie and Freddie?
    OBAMA and the Democratic Congress.
    So when someone tries to blame Bush…
    REMEMBER JANUARY 3rd, 2007…. THE DAY THE DEMOCRATS
    TOOK OVER!” Bush may have been in the car, but the Democrats
    were in charge of the gas pedal and steering wheel they were driving.
    So James these are pure facts, like it or lump it. Next time do not be so quick to place blame. It is obvious that you have no earthly idea as to what you are talking about.

  4. Bev Says:

    Thanks, Hoyt, for a very succinct history that is NOT revisionist.

  5. Bill Says:

    Hoyt, Thanks for helping James understand what really happened. Though, something tells me James will still venture on in life with his head very firmly planted up his ass. Good luck James!