Keynesian economic policies can often
provide needed relief in dire situations like we’ve faced in the past six
months. However, as those circumstances abate, institutionalizing Keynesian
policies can have a much more detrimental long-term impact than simply letting
the system painfully, but quickly, correct.
We saw an optimal solution play itself
out under Ronald Reagan. During his administration, the federal government
dramatically expanded military spending. It also cut taxes, giving consumers,
businesses, and investors more money, which flowed throughout the economy and
boosted everyone’s standard of living. At the same time, the Federal Reserve
used monetary policy to skillfully manage the inflation crisis that had risen
to unsustainable levels in the 1970s.
So far during the Obama administration,
some things are going right, while others are going wrong.
For instance, instead of fighting
inflation with tight money like Paul Volcker, Ben Bernanke is fighting
deflation with “quantitative easing.” This is a positive development.
Instead of spending money on the
military, like Reagan, Obama is spending on social programs and domestic
infrastructure. This would be good, if the expenditures all flowed to
contractors in the next 12 to 18 months. As it stands, the stimulus balances
the good and the bad; it’s probably not too little, but it’s likely to
be too late.
So what’s the problem? Why did a survey
of leading economists recently give the Obama administration an “F” for its
handling of the economy so far? The problem starts with its mismanaging of
public and investor expectations for the medium- to long-term.
These expectations are based on
historical experience, and they are triggered by the experts’ understanding of
the Keynesian track record. For example, David R. Stokes compares the early
weeks of the Obama administration to the days in 1964, when Lyndon Johnson
declared the dawn of the “Great Society.”1 That set the nation on a course that tripled the
government’s spending in 10 years. It took several decades before the damage
to the economy was reversed through the efforts of first Richard Nixon, then
Ronald Reagan.
By lowering marginal tax rates...
