Keynesians Are both Wrong and Dangerous

Dear Mr. President,

The Keynesian school of thought on the economy is that of the potential instability of the private sector and the undependability of the market driven self-adjustment factor. Keynes during his day said that in times of depression (or deep recessions) the government should focus entirely on spending by injecting the national economy with lots of cash. So the task was simple: spend more on goods and services thereby shifting aggregate demand in the other direction and presto we are out of the recession.

However, Keynes put forth these thoughts during the Great Depression. In which inflation was not a threat, prices were falling, and unemployment was reaching 25 percent. Since the goal was to get the national economy back to full employment, the only model used for analysis was the aggregate demand curve in relation to real GDP gaps. There was no need to study aggregate supply and aggregate demand, prices and real job growth because he was only interested in what market participants would buy during the depression if the economy was producing at full capacity. So a new model called the Keynesian Cross was coined which basically focuses on the differences in total spending to the value of total output. It doesn’t account for true distinctions for price levels and real output, i.e., real job growth.

An increase in aggregate demand effects real output and prices but doesn’t always translate to a dollar-for-dollar improvement in real GDP. Again, and to his defense, Keynes’ ideas were during the Great Depression — falling prices, etc., — this is not the Great Depression, so when supply and demand increases so do prices. As a result we still stay short of full employment, consumer spending stays down, wages become relatively low, the economy fails to rebound and possibly falls back into recession.

To increase aggregate demand roughly by the amount of a GDP gap, or recessionary gap, and obtain full employment will only work if prices stay the same. But infusion of government spending makes that impossible as the markets have to now readjust between supply and demand, prices and wages, etc.

Now let me propose a historical model that may be of some use to you, Mr. President.

According to American Enterprise Institute for Public Policy Research President Ronald Reagan, along with historical tax cuts, and growing the economy at a phenomenal rate based off fairness and reward system did precisely that. The model known as Reaganomics gave two different tax rates, high and low, which proved the lower rate could produce the same revenues and, in time, even more. The model created immense wealth by rewarding success. This form of stimulus targeted private investment and spending to revitalize the sluggish economy instead of government spending. The result was an economic frenzy and the idea quickly spread around the world and still guides economies around the world to this day.

While doing this, Reagan simultaneously implemented more spending cuts than any other president in the modern era. Though Reagan is more criticized for his second term for major increases in defense spending which negatively offset the amount took in relative to the amount the federal government spent. This shouldn’t cause one to overlook that Reagan, like Obama, inherited a recession. The difference, however, was that within 17 months of his first term, Reagan’s policies effectively ended the recession (1981 to 1983).

Unemployment hit a high of 10.8 percent in December 1982. But then economic growth spiked, and the unemployment rate began a long, steady decline throughout the 1980s. It was obvious the program was working when people stopped calling it “Reaganomics.”

Tax cuts were a part of Reagan’s effort to cut the size and scope of government to fight economic stagnation. “Government is not the solution,” Reagan said in his remarkably clear inaugural address. “It is the problem.”

In addition to tax cuts, Reagan reduced domestic discretionary spending and streamlined regulations to make them less of a burden on businesses seeking to create jobs. He believed that government should give individuals and businesses the proper incentives to grow and expand and not inhibit the private sector with high taxes and cumbersome regulations. (Frank J. Donatelli, Politico)

More importantly when considering Reagan’s overall record “every other president since Lyndon Johnson serving a full four-year term did not even do as well as Reagan in his less-impressive second term.”

  • President Reagan cut the budget of eight agencies out of fifteen during his first term, and ten out of fifteen during his second term.
  • President Clinton cut the budget of nine out of fifteen agencies during his first term but cut none during his second term.
  • President George W. Bush has cut none of the agencies’ budgets during his first term.

  • President Reagan is the only president to have cut the budget of the Department of Housing and Urban Development in one of his terms (a total of 40.1 percent during his second term).
  • President Reagan is the only president to have cut the budget of the Department of Transportation. He cut it by 10.5 percent during his first term and by 7.5 percent during his second term.
  • During his first term in office, President Reagan cut the real budget of the Department of Education by 18.6 percent, while President Nixon increased it (that is the education part of what was then the Department of Health, Education, and Welfare) by 19.1 percent. That budget increased by 22.2 percent under Bush 41 and by 38.5 percent under Carter. Our current president has increased it by a whooping 67.6 percent.
  • Reagan managed to cut the budget of the Department of Commerce by 29 percent in constant dollars during his first term and by 3 percent during his second one. President Clinton by contrast increased the department’s budget by 24 percent in his first term and then by 96.7 percent in his second term.
  • President Reagan cut the real budget of the Department of Agriculture by 24 percent during his second term in office.

These isn’t merely a gash and slash approach. As also stated in the research, “President Reagan never cut the budgets of the departments of Defense, Health and Human Services, Justice, or State.” (See: President Reagan, Champion Budget-Cutter)

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