Why Keynesian Economics is Failing America
Over the last few months we have seen a dramatic shift in sentiment regarding the economy and the direction which it is headed. In the middle of April the markets peaked, while the consensus seemed to be that although the U.S. economy was still weak, things were gradually getting better. The stimulus would be sufficient to eventually spur the creation of jobs and ultimately, once withdrawn, organic growth. Much has since changed for the worse, as even the once euphoric Keynesian believers now find themselves incredulously wondering if government efforts will be enough to pull us out of this dreadful economic malaise. This decrease in confidence is now the fed's achilles heel.
Keynesian economics is to confidence as Life is to water. For those of you who had nightmarish experiences with SAT's in high-school, I apologize for the unpleasant reference. But the main reason I write this is because I believe it succinctly describes an extremely important point: Keynesian economics ultimately serves to bolster confidence within the economy. Just as life (as we know it) cannot exist without water, Keynesian economics cannot exist without public confidence. It creates an illusion of a strengthening economy--one that is self-sufficient and growing, endeavoring to convince employers to reinvest in their businesses, consumers to spend, and banks to lend. If the illusion fades before all of the former increase to "healthy" levels, Keynesian methods have the serious risk of failing--and failing quite extraordinarily.
So why is Keynesian economics failing now? Well I would argue that it was doomed to fail--in this context--since the beginning. Why? The U.S. national debt. Why is this so problematic? Well the national debt has grown to a level that is serious--serious enough to consume 30% of US GDP by 2015. So many want to be fiscally responsible at a time when others--including the administration--want to spend enormous amounts of money. Prior to the stimulus bill being enacted into law, Obama and his constituents did acknowledge their concerns over the national debt and the importance of spending it prudently. But Keynesian economics cannot have fiscal restrictions. Having spending concerns due to high preexisting levels of debt places constraints on Keynes, limiting its flexibility and effectiveness. When looking to employ Keynes, preexisting fiscal problems make it extremely difficult to have success via the stimulus method, as timing, methodology, and magnitude of stimulus must all be implemented with superhuman accuracy. In order words, a solid balance sheet is a prerequisite to employing Keynes. With poor financial standing, people become concerned with "how long?" and "how much?" it will take before it can be withdrawn, undermining confidence. These questions cannot be the priority which they have become in order for Keynes to yield fruitful results. We must be under the illusion that the government can spend indefinitely, if need be, and how much the government spends does not trump efforts to spur a recovery. We of course are experiencing an increasing view of the opposite.
Therefore, what I am suggesting is that if the U.S.'s current levels of debt were half of what they are today, we would not be seeing the steep drop in many of the various economic indicators we have been seeing lately. Would Keynesian economics then succeed? I'm not so sure; however, it would undoubtedly have a much better chance.
With confidence on the decline, evidenced in stagnant unemployment, lack of inflation, consumer sentiment, small business sentiment etc. the Keynesian veil is being removed prematurely. And with cries over the U.S. debt growing louder, more stimulus would only act to erode confidence further.
At this point it seems we have only one option and that is the way of the Austrian School. We must forego more stimulus, cut entitlement spending, and decrease government interference. The economy will likely fall back into recession as a result, causing a great deal of pain in the meantime. But as the economy falls back into recession, massive de-leveraging will ensue, setting the stage for a healthy, fast, and robust recovery once the excess is removed. My only fear is the real potential that if the de-leveraging process takes very long it could make it rather difficult for the government to make good on its debt payments, with a potential default. If that were to occur, well my friends, there is still very significant pain ahead.
While my outlook on the economy is rather bleak over the next few years, i have a great deal of confidence in this country. Long term my outlook is very positive and we will bounce back from this coming out stronger than ever before.