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YOUNG: Killing Keynesianism?
With government already so large, stimulus spending has little effect
By J.T. Young
6:00 p.m., Tuesday, September 14, 2010
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Is the recession's great irony
that government spending killed Keynesianism? With economists, bankers and
investors perplexed over the economy's continued funk, we cannot be blamed
for looking in odd places for answers. Could it possibly be that
continuously increasing spending over eight decades has left little ability
for
government spending to affect the economy?
How could increased overall government spending have priced stimulative
spending out of the market? To understand what has happened, we must look back
to the 1930s. The New Deal was a concerted effort for government to take
up the economy's slack.
In 1930, federal government spending (a 6 percent nominal increase from
1929) amounted to 3.4 percent of gross domestic product (_GDP_
(http://www.washingtontimes.com/topics/gross-domestic-product/) ). Under
President
_Franklin D. Roosevelt_
(http://www.washingtontimes.com/topics/franklin-d-roosevelt/) 's New Deal,
federal spending would top out at 10.7 percent of _GDP_
(http://www.washingtontimes.com/topics/gross-domestic-product/) in 1934 - only
breaking the 10 percent threshold twice more in the 1930s. The increase of
government relative to the economy was roughly threefold.
In contrast, the _federal government_
(http://www.washingtontimes.com/topics/federal-government/) consumed 24.7
percent of America's _GDP_
(http://www.washingtontimes.com/topics/gross-domestic-product/) last year. As
large
as the economic stimulus nominally was, it was just a fraction of the
nation's $14 trillion economy.
While arguments still rage as to the New Deal's efficacy, at least
government intervention was fiscally plausible then. Because of the
_government_
(http://www.washingtontimes.com/topics/federal-government/) 's previously
minor economic impact, it could grow so much larger because it historically
had
been so much smaller.
In that regard, it was in line with _John Maynard Keynes_
(http://www.washingtontimes.com/topics/john-maynard-keynes/) ' own theorizing.
He had
envisioned government performing a countercyclical economic function.
Government
intervention would increase during an economic downturn but, just as
important, it would decrease once the economy recovered. It would dampen the
cycle he believed to be inherent in the economy: eliminating innate volatility
by filling in the troughs and pulling down the peaks.
Washington was happy to embrace _Keynes_
(http://www.washingtontimes.com/topics/john-maynard-keynes/) ' theory to
advance government growth, thereby
putting more resources into its own hands. It welcomed increasing government
intervention during economic downturns but resisted decreasing it in
recovery. While _Keynes_
(http://www.washingtontimes.com/topics/john-maynard-keynes/) ' goal was
economic, theirs was political.
Keynesianism was taken only semiseriously in Washington - the spending half
of the theory. Today, the _federal government_
(http://www.washingtontimes.com/topics/federal-government/) 's share of the
economy is roughly 2 1/2
times its New Deal peak. Even absent the current downturn, the Congressional
Budget Office only projects its further increase as entitlement spending
swells.
As a result, it is no longer possible for the _government_
(http://www.washingtontimes.com/topics/federal-government/) to administer the
economic jolt
it attempted in the 1930s. At a quarter of the economy now, government
could hardly triple economically as in the 1930s. Today's large nominal
increases in spending amount to little relative economic impact.
Indeed, these increases actually could have a perversely opposite effect.
When government was historically small, the reasonable expectation was it
would return to historical levels with economic recovery. Eight decades and a
much larger government later, this is hardly today's expectation.
Increased economic intervention now may be tapping into underlying concerns of
deficit, debt and taxes - offsetting any stimulative effect.
The _assumption government_
(http://www.washingtontimes.com/topics/federal-government/) will not retrench
could be a rational expectation at this
juncture. In 1934, the federal budget deficit was 5.9 percent of _GDP_
(http://www.washingtontimes.com/topics/gross-domestic-product/) . Last year, it
was
9.9 percent of _GDP_
(http://www.washingtontimes.com/topics/gross-domestic-product/) - only
slightly less than 1934'stotal federal spending
percentage.
Increased government spending could then be having an expectation effect
similar to inflation. Inflation, in a historically stable money supply, can
temporarily stimulate, as its effects are not readily recognized.
Over a prolonged period however, inflation is recognized, and the reaction
is quite different. The market builds in premiums to offset inflation's
effects. The negative effect is factored in immediately, eventually more than
offsetting any stimulative effect an inflated money supply might have.
Is such the case, over a much more prolonged period of time, with
government spending today? The current expectation is that government spending
is
high and will only increase. An attempt, therefore, to use a spending
increase temporarily to jolt the economy is not only more difficult, but may
not
work as it might have 80 years ago.
It could be adding yet further uncertainty to the economic uncertainty
already prevailing. Financial markets brace themselves not only for the
current downturn but for the aftereffect of having raised the spending base
line
still higher.
With economic tools running low and economic results running even less, we
must search harder for an explanation. The _government_
(http://www.washingtontimes.com/topics/federal-government/) is dramatically
larger than
anything that could have been imagined when _Keynes_
(http://www.washingtontimes.com/topics/john-maynard-keynes/) ' theory
prevailed. Government spending may
be such a large part of the economy that it can no longer serve as an
exogenous stimulant.
--
Centroids: The Center of the Radical Centrist Community
<[email protected]>
Google Group: http://groups.google.com/group/RadicalCentrism
Radical Centrism website and blog: http://RadicalCentrism.org
