Keynes is Dead; Long Live Adam Smith

The economic theories of John Maynard Keynes have undergone a stiff test over the past few years in Socialist Europe and in Barack Obama’s United States. What we’ve gotten is unsustainable deficits, a jobless rate hovering around 10% and the near collapse of parts of the European Union.

Obama is still a true believer, but the rest of the world is beginning the process of exorcising Keynes.

It’s about time, even though President Obama is still dutifully committed to the idea that the Keynesian model will win out. It won’t, it never has, and it never will.

Eventually, the massive debt catches up with any government as we are seeing in Greece or you get the “stagflation” that brought down President Carter. Obama, however, is driven largely by ideology and he will never give up on an economic system that carries with it elements of “social justice” and collectivism.

Any study of Keynes could end up as long as, well, the Democrats’ new financial regulation law.  So suffice it to say that he is considered by many the great economist of the 20th Century. His ideas, presented in The General Theory of Employment, Interest and Money, published in 1936, essentially argue that recessions are best mitigated by vast government intervention—like stimulus spending. Keyes believed in a “multiplier” that would produce $1.50 worth of growth for each $1 spent.

It never works out that way.  The $1 in spending comes from the pockets of the producing class—those operating a business or gainfully employed—or it is borrowed. So it either becomes a drag on business or increases the debt.

But then, the argument goes, why didn’t I and other talk radio hosts criticize President Bush when he installed a new entitlement and failed to veto big spending bills? We can easily put that to rest. In 2006, Rush Limbaugh announced that he would no longer “carry the water” for the Bush administration.

I was asked by the Dallas Morning News to write a column reacting to Limbaugh’s proclamation, and it was published on Dec. 17, 2006. In it, I said: “My Rush Limbaugh moment came the day after the elections. I trudged down to the garage with a razor blade and a bottle of Windex and sadly scraped off the ‘W-04’ sticker that had been on my window for the past two years. Already, on my radio show, I had given up on George W. Bush as a conservative long before Rush’s now-famous comment.”

And that was written before I even knew about TARP and Bush’s stimulus package and the takeover of two American car companies. All very Keynesian and all wrong. But not to Obama. He picked up where Mr. Bush left off.

In its glee, Newsweek published a homage to Time’s 1965 cover story “We are all Keynesians Now.” But we are NOT all Socialists as Newsweek said and we have never been all Keynesians. Read Adam Smith, Friedrich von Hayek of the Austrian School, Milton Friedman, Arthur Laffer—or Ronald Reagan. President Reagan’s 1981 “Kemp-Roth” tax-cutting bill used supply-side economics to actually create long-lasting prosperity from the throes of recession.

Obama has been telling the leaders of the G-20 nations to keep piling on the debt. In fact, he and his advisor, Larry Summers, are pushing for Stimulus III, arguing as Keynes would if he were here, to keep spending and worry about the debt later. The rest of the world is going the other way—for the simple reason of national survival. Keynes is dead. As Sandburg might say, let the dead be dead. In fact, we ought to sprinkle salt on the grave.