Keynesians Keep Trying to Control the Economy

Henry Hazlitt

President Obama’s economic policies have been based largely on his administration’s interpretation of John Maynard Keynes’ General Theory of Employment, Interest, and Money (Harcourt, Brace & Co., 1936). Federal Reserve Chairman Ben Bernanke likes Keynesianism also. Keynes became popular largely by proposing massive deficit spending as a key element for getting out of the Great Depression. Politicians loved the idea, because they like to spend money, and Keynesianism gave them cover to do so without raising taxes, should they so choose.

America has been accumulating the results of Keynesianism for decades, and is now dangerously close to a real day of reckoning concerning our huge national debt. Europe is already considering seeking a bailout from China. What Americans often fail to think about is: Who’s going to bail the U.S. when we get to that point? And we surely will unless some serious changes in direction are made fairly soon. The answer: No one. There is no one to bail us out. Would we end up repudiating our debt? Would we write it off in bankruptcy, allowing treasury bills to become worthless? Who knows?

Henry Hazlitt’s 1959 book, The Failure of the New Economics: An Analysis of the Keynesian Fallacies (D. Van Nostrand Co., Inc.) refutes Keynes at numerous points, quoting extensively from his book. (Ebook version of the Hazlitt work is available for free download at Mises.org.) Hazlitt was closely associated with Austrian school economics of Ludwig von Mises, Fredrich A. Hayek and others, and was a prolific writer and champion of individual liberty. [1]

Since the days of Franklin D. Roosevelt, Keynesians have dominated government economic policy and academic instruction, countered somewhat by classical theorists and monetarists, vastly growing the government, with some relief along the way, but leading to the distress we have experienced since the 2008 financial crisis and the concurrent recession. Keynes held “full employment” as the goal, but the Keynesians have delivered now-chronic high unemployment.

When Michelle Bachmann says that it “wouldn’t take that long” to turn the economy around, and when she says that her policies would lead us back to $2.00-a-gallon gasoline, she should be taken seriously, because she has a much better grasp of our economic situation than the current powers that be. She has some understanding of market forces, and does not have the contempt for the free market that the socialist regime has.

It is an axiom of economics that for economic growth, there must be saving and investment, and profits. Saving leads to availability of credit and it leads to investment. Keynesianism has led the Federal Reserve to set interest rates at near zero, and they have announced plans to keep them there for a long time. This stifles saving and investment. The Fed has encouraged easy availability of credit by pumping money, created out of thin air, into the system. Keynes discouraged individual saving and wanted low interest rates. He also wanted government to control investment. Small excepts from Hazlitt:

“The outstanding faults of the economic society in which we live,” Keynes begins, “are its failure to provide for full employment and its arbitrary and inequitable distribution of wealth and incomes” ([Keynes] p. 372).

There are four chief things wrong with this statement:
(1) The vagueness of Keynes's "full employment" concept …
(2) Prolonged mass unemployment is not the fault of our economic “society,” but of governmental interventions in labor-management relations, wage-rates, and money and
banking policy—the very kind of intervention that Keynes wished to increase.
(3) The distribution of wealth and incomes is in the main neither “arbitrary" nor “inequitable” in a competitive free market system. As John Bates Clark showed so brilliantly in “The Distribution of Wealth” (1899) “free competition tends to give to labor what labor creates, to capitalists what capital creates, and to entrepreneurs what the coordinating function creates.” Individual inequities are bound to occur, but they are not systematic. Capitalism itself tends constantly to reduce them by its rewards to production. If we are looking for really “arbitrary” and “inequitable” distribution, we can find it in the East, or in backward and “underdeveloped” countries, or in Communist Russia and China—in short, in either pre-capitalistic or socialist societies.
(4) It is even a misnomer in capitalist countries to call this process “distribution.” Income and wealth are not “distributed” but produced, and in general go to those who produce them. [Hazlitt, Pp. 374-375]

Keynes's arguments against “liquidity” and against “speculation” are untenable. Speculative anticipations and risks are necessarily involved in all economic activity.
Somebody must bear them. What Keynes is saying is that people cannot be trusted to invest the money they have themselves earned, and that this money should be seized from them by government officials and spent or “invested” in the directions in which those officials (seeking to hold on to political power) deem best. [Hazlitt, Page 430]
(Emphasis added)

President Obama has been accused of a “class warfare” attitude because of his insistence upon raising taxes on millionaires. His liberal base likes any policy aimed at going after the “rich,” or, redistribution of income. The president in his September 20 speech accused House Majority Leader John Boehner of having a “my way or the highway” position for not being willing to accept any tax increases, but Obama himself adopts a “my way or the highway” stance with the opposite position.

Obama wants to take more money out of the hands of job creators to “invest” in things his administration would like to “invest” in, i.e., spend for. Government, in their view, owns all the money, and they only let us keep whatever portion of it they choose.



Rep. Paul Ryan (R-WI) appeared on Fox News Sunday the day before the president’s speech and indicated that Republicans would not be able to accept much of what the president was expected to propose, and characterizing it as “class warfare” approach. Ryan explained why more new taxes are not the answer:



Socialist policies lead to authoritarian controls and less freedom. Obama’s jobs bill and tax proposal, though unlikely to become law, do illustrate the Keynesian tax and spend philosophy. Obama’s wish is to get higher taxes now, and make “cuts” some time in the future – cuts which are unlikely to happen if liberals have their way.

As I have said before, class envy is the very lifeblood of liberalism, and exploiting and promoting the class struggle is the process. It has this in common with communism. Obama, the great uniter, is now reduced to pandering to labor unions by threatening “the rich” with higher taxes and more regulations, for his own political purposes. Neither his “jobs” bill nor his proposal for “paying for it” is likely to gain any ground, nor would they help with the actual problems if they were to be passed. The proposals are certainly no better than the previous “stimulus” and would create at least one more new government agency, the “Infrastructure Bank.” As if we didn’t have enough slush funds already (see Fannie and Freddie).


[1] See Keynes vs. Hayek rap video here. Sequel here.

Photo: Ludwig von Mises Institute, via Wikipedia.

Don’t Blame Me, I’m Just the President

Image via Wikipedia

President Barack Obama

News item:

WASHINGTON (Reuters) - President Barack Obama said on Monday he inherited many of the country's problems with high debt and deficits when he entered the White House, sounding a theme likely to dominate his 2012 re-election campaign.

* * *

President Barack Obama would have us believe that he’s doing, and has done, his dead-level best to get America’s economy back to where it should be. But he’s been obstructed by everyone else, especially those Tea-Partiers, GOP leaders, and European problems, not to mention the Japanese tsunami, and probably global warming.

There are numerous issues on which Obama and Company are so wrong that the U.S. economy is being wrecked, or, as Ben Stein mentioned a year or two ago, they’re standing on the economic oxygen hose and the patient is getting worse.

“A Theme Likely To Dominate His 2012 Re-election Campaign”

In 2008, Mr. Obama campaigned as one who seemed to have the answers, knew the best strategies, and, while criticizing the Bush Administration, offered no hint of thinking that they had created any problems that he couldn’t overcome. Yet now, Bush is going to be blamed as Obama runs for a second term? He’s going to have to spend eight years undoing Bush’s damage? Seems that will be his message, according to Reuters.

“Tea Party Downgrade”

A recent Democrat talking points memo had David Axelrod, John Kerry, and others putting forth the phrase “Tea Party Downgrade,” as though the intransigence of the Tea Party is what resulted in the credit rating downgrade of U.S. securities by Standard and Poor’s. The agency followed up on Monday, August 8, 2011, with downgrading Fannie Mae and Freddie Mac and other federal institutions. The explanation for blaming the Tea Party for any of this is the ludicrous claim that they refused to “compromise,” and that, as Axelrod stated, the ratings agency was looking for revenues. Standard and Poor’s explicitly said that they weren’t addressing that aspect, but they were concerned with the increasing debt, and the lack of any viable efforts to get it under control.

I suppose it’s George W. Bush’s fault that the Democrats in Congress have not passed a budget in over two years, and that the budget Obama submitted would have accelerated spending and the deficit. Congress could not support it. Nor could they support a bill to increase the debt ceiling without regard to the deficit or spending cuts. Republicans, meanwhile, have submitted actual plans, Paul Ryan’s, and the Cut, Cap and Balance proposals, for instance. All of which were said to be DOA in the Senate and/or on the President’s desk. Tea Partiers were trying to do what they were elected to do, and in the end were influenced by Speaker John Boehner’s fear of allowing a default, and got into line to vote for the insipid plan that finally passed. But at least they held the line on taxes, a not-insignificant thing.

“The Grand Plan”

Obama wanted a “grand plan.” That way, he could put off any cuts until two years down the road (slowed acceleration of spending being regarded as a “cut”), get significant tax increases quickly, and spend several hundred billions more in “stimulus.” But of course he bears no responsibility for the credit rating downgrade. If you believe that he doesn’t, perhaps you’d be interested in a bridge for sale in Brooklyn. But even the “grand plan,” never saw the form of an actual proposal written down on paper. So of course the President couldn’t be held to anything he might have said.

If you listen to the president and his helpers, you get the idea that our economic problems would be solved if only those corporate jet owners and the “rich” would pay their fair share. Not mentioned is the fact that the top percentiles of earners pay the overwhelming majority of income taxes, and about 47 percent of American workers pay no income tax. But the problem is not taxes. The problem is spending. You can be sure that if taxes were increased today, Obama would quickly find ways to spend every cent of any increased revenue (and not toward retiring the debt), and soon revenues would actually be lower because the economy would shrink even more.  Liberals will never reduce spending and they will always want higher taxes. This should be axiomatic by now. Promises of future reductions are made, but never fulfilled.

So far, there have been no spending cuts, and the Democrats are calling for more spending. Somewhere, John Maynard Keynes is probably smiling. But most of us are not.