Keynes Was Wrong:Bigger Government Does Not Boost Growth

Cato Hill Forum, December 18, 2008

Keynesian Theory

Government should “inject” money into the economy to boost “aggregate demand” with deficit spending (or tax rebates).This will “prime the pump” or “jump start” growth as the money begins to circulate through the economy.

Real World Evidence

There have been many Keynesian episodes, most notably the 1930s under Hoover and Roosevelt.On a more modest level, Gerald Ford and George W. Bush tried Keynesian policies.Japan was Keynes-land in the 1990s, with special emphasis on infrastructure.

The Hoover-Roosevelt Experiment

Both Hoover and Roosevelt increased tax rates.Both Hoover and Roosevelt increased government intervention.Most importantly, both Hoover and Roosevelt dramatically increased government spending, financed by debt, as Keynesian theory suggests.

Hoover and Roosevelt Failed

Unemployment averaged more than 17 percent during the 1930s.GOP in 1940 was still below the 1929 level.In 1939, Treasury Secretary Henry J. Morgenthau Jr. testified before the House Ways and Means Committee: "I say after eight years of this Administration we have just as much unemployment as when we started… And an enormous debt to boot"

Recent Keynesian Episodes

Gerald Ford’s tax rebate in the 1970s.No positive impact on the economy’s performance.The 2001 and 2008 Bush rebates.No positive impact on the economy’s performance, unlike the good results from the 2003 tax-rate reductions.

Japan = Keynes-land

Japan’s experiences in the 1990s show the wrong way to do things (not only on spending, but also on bubbles).Numerous “stimulus” schemes.Massive infrastructure program.Pure Keynesian experiment…leading to no positive impact on growth.

Conclusion

There is no free lunch.More spending does not work.Tax rebates and tax holidays do not work.The only good short-run policy is good long-run policy.Government causes problems rather than solving them.