The Magic, Fairy Dust Naivete That Is Progressive Economics


ACRU Staff


June 17, 2013

This column by ACRU General Counsel and Senior Fellow for the Carleson Center for Welfare Reform (CCWR) Peter Ferrara was published June 16, 2013 on

Let’s proclaim the Good News: Government money is free. No, not just to the beneficiaries of government programs. To society as a whole. Meaning there is no economic cost to government spending whatsoever. The more the government spends, the richer we will all be. Let the Good Times roll.

That is the foundational principle of Keynesian economics, which is heart and soul “Progressivism.” Every Paul Krugman column can just be replaced by the summary paragraph above.

Money doesn’t grow on trees, you say? That outdated notion is where you went wrong. Today’s paper money IS trees.

The liberal left wing that dominates the Democrat Party today so can’t stand cutting just 1% to 2% of federal spending, just from the growth in spending, as provided in the sequester, that they are saying that the sequester spending cuts involve “austerity,” which, they claim, is slowing economic growth, jobs, and the non-existent recovery. This is based on the failed, discredited, outdated economic doctrine of Keynesian economics, which holds that economic recovery and growth is restored by increasing government spending, deficits and debt. This supposedly increases “aggregate demand,” which supposedly stimulates increased production, and hiring, to meet that demand.

You can see exactly this being said in the public debate today. President Obama’s senior economic advisor during his first term, Harvard University Professor of Economics Larry Summers, testified before the Senate Budget Committee on June 5 that during times of sluggish economic growth at least, “Borrowing to support spending, either by the government or the private sector, raises demand and therefore increases output and employment above the level they otherwise would have reached. Unlike in normal times, these gains will not be offset by reduced private spending because there is substantial excess capacity in the economy….”

Summers added,

“Consider the effect of the sequester in 2013. The sequester will impact the last 10 months of calendar year 2013. The CBO estimates that the sequester will, over this 10 month interval, reduce spending by $64 billion [out of total federal spending during this year of close to $3.7 trillion, or nearly 60 times as much]….However, we must also consider the sequester’s effect on GDP growth. The CBO estimates that the sequester will reduce the GDP growth rate in 2013 by 0.6 percentage points. This stifling of growth actually increases the debt/GDP ratio through two effects: First, by reducing the GDP growth rate, the sequester reduces the denominator of the debt/GDP ratio. Second, lower GDP during 2013 means lower tax revenue, which increases the deficit.”

So the conclusion that Summers draws is,

“[I]t would not be desirable to undertake further measures to rapidly reduce deficits in the short run. Excessively rapid fiscal consolidation in an economy that is still constrained by lack of demand, and where space for monetary policy action is limited, risks slowing economic expansion at best and halting recovery at worst. Indeed, there is no compelling macroeconomic case for the deficit reduction now being achieved through sequestration, as the adverse impacts of spending cuts on GDP more or less offset their direct impacts in reducing debt.”

Senate Budget Committee Chairwoman Patty Murray reflected this thinking in hearings the previous day, saying,

“When the economy is struggling, government should act to make things better for the middle class and most vulnerable families by investing in jobs and economic growth [meaning increasing federal spending, deficits and debt] that not only boosts demand in the short term, but also helps lay down a strong foundation for long-term and broad-based growth for years to come….Right now, we’re seeing how the indiscriminate and irresponsible cuts from sequestration are hurting the economy….And continuing on the path to austerity right now [meaning making minimal cuts just in the growth of federal spending] would weaken our economy and do serious damage to job creation and growth….In fact, the bipartisan Simpson-Bowles commission highlighted the importance of ‘investing in [meaning increasing federal spending, deficits and debt for] education, infrastructure, and high-value research and development to help our economy grow, keep us globally competitive, and make it easier for businesses to create jobs.'”

But all of this is transparently fallacious, and the marked decline in the ability of our nation’s supposed “elites” to reason, or even to communicate clearly, is markedly contributing to the rapid decline of America. The 2009 stimulus in particular included heavy increases in spending for infrastructure, to no good effect for jobs, wages, middle class incomes, or economic growth.

The truth is that Keynesian economics is just plain silly, no matter how many academic eminences embrace it, because increasing government spending, deficits and debt does not increase “aggregate demand.” That is because the money to finance that government spending, deficits and debt must come from somewhere. So if you increase federal spending, deficits and debt by close to a trillion, as the Obama/Democrat so-called 2009 “stimulus” did, and finance that government spending, deficits and debt by borrowing an extra trillion dollars out of the private sector, the net increase in aggregate demand is no more than ZERO at best. [This is why the Wall Street Journal‘s Steve Moore has rightly called Keynesian economics “magic fairy dust economics.”] In fact, the whole transaction is probably a net drag on the economy, growth, jobs and wages. (This reasoning still applies even when there is supposed “substantial excess capacity in the economy.”).

That, in fact, is exactly what happened with the 2009 “stimulus,” because as several of my recent columns have documented, the supposed recovery under President Obama from the 2008-2009 recession was the WORST recovery of any previous recovery from any previous recession under any previous President since the Great Depression. It took far too long for the economy to grow back to the previous peak of GDP, we still have not recovered all the jobs lost during the recession, which is taking far longer than for any previous recovery since the Great Depression, poverty has soared during Obama’s entire Presidency, even though the recession actually ended four years ago, middle class incomes have actually declined all that time as well, and economic growth during Obama’s first term was the worst of any President since the Great Depression as well, worse even than during the one term of Jimmy Carter, or during the awful second term of George W. Bush.

This pitiful, disastrous, inexcusable economic record is particularly egregious because the American historical record is the worse the recession the stronger the recovery, as the American economy always rebounded back to it’s previous, long term, world leading, economic growth trendline. As a matter of math, that means faster than normal growth, until we return to the normal, stable, long term growth trendline. Professor Summers did much better during the 1990s serving under President Clinton, when Newt Gingrich was running the economy, and his predecessor at Treasury in Robert Rubin was protecting the dollar. Given his less well supervised, more recent performance under President Obama, Professor Summers should be retired, instead of pretending to tutor the Congress on economics.

But there is an even more fundamental problem with the logic of Keynesian economics, bes
ides the magic fairy dust problem. Demand can never be inadequate in a free market economy. Demand is insatiable in fact. [Verify that with a talk with your teenage daughter, or son]. If the demand for any particular good or service is inadequate for the supply produced, the price will just fall for that good or service, until demand equals supply. Consumers can never consume more than is produced, no matter what policies the government follows to increase “aggregate demand,” and they will never consume less, as the market price system will see to that.

This is because what really drives economic growth, recovery, and prosperity is not “aggregate demand” (a fallacious, fabricated, concept, in fact), but economic production and output. Rich nations, like rich people, are not rich because of their demand for goods and services, but because of their production. Those who produce more, consume more. Demand is not the problem. Production is.

And what drives increased production, economic growth, and prosperity is the economic incentives for such production, growth and prosperity. The more fundamental reason why President Obama’s “recovery” and economic record are so bad is because he has consistently followed anti-growth policies across the board, squelching incentives for increased production.

On taxes, President Obama has now raised top marginal tax rates across the board for virtually every major federal tax. That includes personal income taxes, capital gains taxes, the tax on corporate dividends, and death taxes. The corporate income tax rate under President Obama is now the highest in the world, and the capital gains tax rate, counting state capital gains taxes, is close to the highest in the world. All these tax rate increases slash the incentives for productive activity, and are predatory in particular to capital investment, which is the foundation for increased jobs, wages and incomes in a capitalist economy. Which is why President Obama isn’t getting any.

On regulation, President Obama has been busily increasing regulatory burdens and barriers across the board, which further reduces the incentives and even the opportunities for increased production. See, e.g., the Keystone pipeline, the out of control EPA, picking and choosing which whole industries to assassinate, Obamacare, Dodd-Frank, etc., etc.

On money, the Obama Administration has provided the political cover for, supported, and cheer-led, the wildest Fed monetary policy in U.S. history, debasing the currency, and sharply undercutting confidence in the dollar, which has survived this onslaught only because it is competing with other fiat, paper money currencies which are even less stable. Bad currency murders economic growth, jobs, wages and prosperity, because investors do not want to invest where they are likely to be paid back in a debased currency worth less, and arbitrary monetary policies produce bubble and bust cycles that can bankrupt almost any enterprise. Today’s Fed monetary abuses are fostering new bubbles, and laying the groundwork for an even worse crisis to come.

And on spending, President Obama has pursued the wildest spree of federal spending, deficits and debt, since World War II, when at least we were fighting, and defeating, Nazi Germany and Imperial Japan, which was ultimately very pro-growth. (Investors like to invest where their investments are less likely to be blown up, and they are less likely to be murdered). Before President Obama, no American deficit had ever been anywhere near $1 trillion. Under President Obama, no deficit has ever been less than $1 trillion. And the national debt as a percent of GDP is roaring towards all-time, World War II records.

Contrary to Keynesian economics, that runaway federal spending, deficits and debt just drains resources out of the more productive private sector, only contributing to further decline and stagnation.

There is within this current economy the greatest boom in world history just straining its bonds to break out, and restore the American Dream — traditional, American, world leading, economic growth and prosperity. All we have to do is set it free, by reversing every one of President Obama’s policies.

That means individual and corporate tax reform, cutting rates, and closing, especially special interest, crony capitalist loopholes, such as President Obama’s green energy tax giveaways. Better if such reform is not revenue neutral, but a net tax cut. Such policies would be served particularly well by the proposed tax reforms of House Budget Committee Chairman Paul Ryan, hopefully to be implemented later this year by House Ways and Means Chairman Dave Camp. For individual income taxes, Ryan has proposed a 10% rate for families earning less than $100,000 a year, and a 25% rate for families earning over $100,000. For corporate taxes, Ryan has proposed reducing the world leading 35% federal tax rate to 25%, which is close to the global average. Ryan also proposes to repeal and replace Obamacare, which would end the Obamacare tax increases.

These lower rates would sharply increase incentives for productive activities, particularly the capital investment which is the foundation for growing jobs, wages and incomes. And eliminating the special interest tax loopholes and preferences would terminate the resulting misallocation of resources to less productive activities and enterprises.

It means deregulation, instead of Obama’s costly reregulation. That would be served by repealing and replacing Obamacare as well, and Dodd-Frank and the EPA’s delusional global warming crusade should join it on the ash heap of history as well. Does that mean returning to the same policies that caused the 2008 financial crisis? That was caused by overregulation, starting with President Clinton’s housing policies, adopted to create housing “fairness,” (what was fair about the housing bubble and its inevitable collapse?), and by the same Federal Reserve monetary policy mismanagement that the Obama Administration has been cheerleading.

Probably most important of all is fundamental reform of the Fed, and monetary policy, to enforce a stable dollar. That would involve tying the dollar to stable, real world measures. Such a stable currency would draw capital investment to America from the world over, as investors would know their investment returns would arrive in a currency with the same real world value as when they first made their investment, and there would be no bubble and bust cycles to threaten the very survival of their investments.

And the final component would be to restore control over federal spending, deficits and debt. The best plan for that would again be Paul Ryan’s 2013 budget, which would actually balance the budget within 10 years, and stabilize the national debt as a percent of GDP at manageable levels. Long forgotten has been Reagan’s much vilified at the time 1981 “Reagan budget cuts,” which contrary to brain dead Keynesian economics left more resources in the productive private sector, and so contributed to Reagan’s 25 year, generation long, economic boom. That boom restored traditional American economic growth and prosperity after the disastrous 1970s, while slaying the double digit 1970s inflation, which all the Keynesian gurus of the time had said was impossible in the real world. Impossible for them.

That leaves as the last question only what would be the appropriate punishment for those blind, persistent fools, who continue to teach and promote Keynesian economics. I will leave that question for suggestions from the commenters.

In conclusion, and in honor of Keynesian economics, and President Obama’s economic policies and their results, we can now amend Orwell as follows:

War Is Peace

Freedom Is Slavery

Ignorance Is Strength

Poverty Is Prosperity



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