Cato Institute fellow Dan Mitchell writes of “Obama’s Stimulus: Five Years of Keynesian Fairy Dust” in which, as he notes, the White House has pulled numbers out of thin air based on economic models using Keynesian theory. Mr. Mitchell explains Obama’s program of redistribution, where it is assumed that there are no “opportunity costs” when government borrows money and spends it. As Dan writes, a nice theory… but only on a blackboard. Stimulus schemes tend to reward interest groups with the most political clout. The biggest problem with Keynesianism is that real world evidence is so unfriendly. Keynesians don’t seem to appreciate that recessions generally are the result of bad government policies—such as inflation, housing subsidies, etc.—that lead to fundamental and unsustainable economic imbalances. Keynesian economics is about the government taking money from the private sector. It is the perpetual motion machine of the left. The political class loves Keynesian theory because it tells them that their vice is a virtue. They’re not buying votes with other people’s money. Instead, they’re “stimulating” the economy.
The Keynesians basically assume that there are no “opportunity costs” when government borrows money and spends it. That’s a bit of economic jargon, but it’s simply a way of saying that Keynesians think that money, for all intents and purposes, will sit idle and gather dust during an economic downturn in the absence of government.
This is a very nice theory…but only on a blackboard.
In reality, there is an “opportunity cost” when government borrows money and spends it. Resources are diverted from the productive sector of the economy. This might not be a problem if government spent money wisely, but stimulus schemes tend to reward interest groups with the most political clout. So instead of outlays for physical and human capital, which at least theoretically might improve the economy’s productive capacity, the White House directed the bulk of the stimulus to redistribution programs and handouts to state governments.
Moreover, the Keynesians don’t seem to appreciate that recessions generally are the result of bad government policies — such as inflation, housing subsidies, etc — that lead to fundamental and unsustainable economic imbalances. Unfortunately, more government spending often is designed to prop up these imbalances, which can create a longer and more painful period of adjustment.
But the biggest problem with Keynesianism is that the real-world evidence is so unfriendly. Consider, for instance, that the White House claimed that the unemployment would never climb above 8 percent if the stimulus was adopted.