Keynesian Ideology and the Coming Crash

In an article at The American Spectator titled The Coming Crash of 2011, Peter Ferrara points out the historical failure of Keynesian governmental intrusion into the free market and contrasts the observed and expected results of Obama’s ideological policies with the known results of President Reagan’s markedly different approach.

Bad economic policies can throw economies into downturns, and delay recoveries. Keynesian economics and rising effective tax rates produced four worsening inflation/recession cycles in and around the 1970s: 1969-1970, 1973-1974, 1979-1980, and 1982.

But Reaganomics was so successful that it all but abolished the business cycle for a generation. The economy took off at the end of 1982 on a 25-year economic boom interrupted by only two, short, shallow recessions in 1990-1991 and 2001. That is why today we no longer recognize the natural workings of the business cycle.

He makes a good point.  Several years ago, well before our current government-caused financial crisis, it dawned on me that I was incredibly lucky to have lived my entire adult life in such comfortable and successful times.  Most people have indeed forgotten that there is a natural business cycle.

The slow and weak recovery from the recession, which has lasted almost two years (a postwar record), shows yet again the failure of Keynesian economics, continuing a long, unbroken record of failure stretching back to the 1930s.

But the Obama Administration came into office knowing that the economy would ultimately recover as the business cycle turned up naturally, and planned to reap the political credit, enabling still greater leaps of neo-socialism. Internally, they are surprised and miffed that it has taken so long, not understanding that their own, blindly anti-market policies only delayed recovery.

Virtually every economic decision made by Mr. Obama since the start of his presidency has perplexed me.  Admittedly, by late 2008 it was obvious to me who this character was and I fully expected him to govern like a naïve leftist, at least initially.  But having witnessed a few of these cycles I also predicted that the self-preservation that often springs from plunging approval ratings would force some economic pragmatism reminiscent of Bill Clinton’s triangulations in the mid-nineties.  However, this President’s ideologically based proposals seem so clearly bad for the economic outlook that I am left with only two choices for explanations.  Either they really are that clueless about economics or their ideology simply trumps it.  Neither of those scenarios bode well for Americans, particularly the future generations about whom today’s liberals seem so coldly unconcerned.

Quoting Art Laffer (of Laffer Curve fame), the author makes the argument that 2010 will be the best economic year of President Obama’s reign.  First, there is a natural bounce-back that can be expected after this deep a fall.  Combined with the effects, albeit short term, of the massive monetary expansion by the Federal Reserve and an artificial heightened productivity resulting from an attempt to beat the tax increases of 2011 this should cause a bubble of growth in 2010.

But Laffer ominously continues that “when the U.S. economy comes to 2011, the train’s going to come off the tracks.”  He argues that the effect of the massive monetary expansion by the Fed will be “petering out” and points out that changes to tax policy are going to contribute to this economic stagnation and collapse:

“And we haven’t even begun to talk about the tax rate increases of 2011. These purely ideological abuses of economic policy will end up punishing working people nationwide. The top income tax rate is scheduled to increase by close to 20%, the capital gains tax rate by at least 33%, and the top dividends tax rate by 164%. Further tax increases in the pending health care legislation would raise these tax rates still more.”

The article’s author closes with this assessment:

Again, just the opposite of the long-term economic boom that followed the 1982 downturn when Reagan first slayed inflation, the flowering of growth in Obama’s second year will be followed by long-term stagnation and economic decline for America, slaying the American Dream, until President Obama’s neo-socialist economic policies are reversed.

I think that the writing is already on the wall for the November 2010 elections.  It will almost certainly be a disaster for the Democrats.  If Laffer’s dismal economic forecast is accurate, the 2012 elections could be an epic landslide reflecting an outright rejection of the American left’s love affair with Big Government Keynesianism.

Now enjoy this enjoyably funny video of “Keynes and Hayek” rapping about their conflicting economic theories.