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It should be obvious to everyone but the most dedicated
adherent of Keynesianism that the stimulus did not accomplish its end. The
combination of outright spending by Congress, the desperate schemes to
reflate the housing market, the attempt to transfuse bleeding firms with
other people’s money, and the creation of trillions in artificial
money, has not done a thing to lift the US economy.
Actually, the reverse has been true. All these
efforts have prevented the adjustment of economic forces to the post-boom
world. And all the resources that the stimulus consumed were extracted from
the private sector, for we must always remember that government has no
resources of its own. Everything it does must come from the hides of private
producers and the citizenry in general, in the future if not immediately.
It’s tedious that we had to learn this lesson
yet again, for it was only 38 years ago that we experienced yet another
collapse of the Keynesian paradigm. The color of the theory was a bit
different in those days. The fine-tuning operations of the government were
supposed to operate according to a fixed model in which there was a tradeoff
between inflation and recessionary unemployment. If unemployment got too high
due to slow economic growth, their solution was said to be simple: reflate
and deal with the costs. If unemployment then became too low in recovery
– leading to an "overheating," as the parlance of the time
put it, the answer was to deflate.
The point of this simple trade-off was to boil down the
opaque notions of Lord Keynes to their central-planning essence, and to avoid
the endless legislative tangles that plagued the New Deal years. The
Keynesians had claimed that FDR’s experiment in countercyclical policy
was not well planned and not scientifically administered, which is why it
didn’t go as planned. Thanks to the postwar clarity of the new, simple
model, Keynesians would get it right this time.
They certainly got their way in terms of policy. In
1971, Richard Nixon had abolished the last vestiges of the gold standard,
finally untying the dollar from any relationship to physical gold and setting
it loose to float like a kite on a string – or maybe without the
string. It was supposed to be the Keynesian ideal. No more fetters. No more
of the barbarous relic. No more limitations on what the scientific planners
in government could or could not do. Now they could act to bring about the
socially optimal combination of inflation and unemployment. Nirvana!
Now keep in mind, here, that this was a testable
proposition. If there was a trade-off at work here that the government could
manage, what we would not see would be, for example, unemployment increasing
at the same time as inflation. Mostly we had not seen this in the past, it is
true. During the Great Depression, prices kept falling (and
thank goodness for that, for this was the only saving grace of the
entire period). There was a slight uptick of inflation in the mid-1950s but
it wasn’t enough to set off alarm bells.
Then came 1973-1974. Unemployment was high and
rising from 4 to 6 percent from the recession lows – and, yes, that was
considered high in those days. At the very same time, inflation rocketed
upward into the double digits. Thus was born the inflationary recession. This
was an animal that was not supposed to exist, according to the model as
understood at the time.
Writing in an essay now featured in his giant
collection Economic Controversies, Murray Rothbard
explained:
This curious phenomenon of a vaunting inflation
occurring at the same time as a steep recession was simply not supposed to
happen in the Keynesian view of the world. Economists had always known that
either the economy is in a boom period, in which case prices are rising, or
else the economy is in a recession or depression marked by high unemployment,
in which case prices are falling. In the boom, the Keynesian government was
supposed to "sop up excess purchasing power" by increasing taxes,
according to the Keynesian prescription – that is, it was supposed to
take spending out of the economy; in the recession, on the other hand, the
government was supposed to increase its spending and its deficits, in order
to pump spending into the economy. But if the economy should be in an inflation and a recession with heavy unemployment at
the same time, what in the world was government supposed to do? How could it
step on the economic accelerator and brake at the same time?
The answer, of course, was that government and its
policymakers could do no such thing. This was when panic set in, and every
cockamamie theory known to man was employed to reduce unemployment and
inflation at once. But there was a problem. The policy makers are always and
everywhere loath to admit fault for anything. Surely it is not monetary
policy that is to blame, they said. Instead, it was the greed of businessmen,
the voraciousness of the consumer class, the panic of the general population
– anything and everything was at fault except the government itself.
So while the Keynesian paradigm had obviously
failed, who in government was willing to take responsibility for this failure?
No one. Therefore matters only became worse, and the inflationary recession
became a way of life for Americans, all the way to the outrages of the late
1970s that finally swept Ronald Reagan into office.
Reagan campaigned on an anti-Keynesian platform. He
even talked about re-instituting a gold standard. He said he would cut taxes
and let the economy work. Those promises amounted to nothing, but there did
seem to be some consciousness at the time that government was not capable of
forever leaning against the market winds. The real credit, of course, goes to
Carter-appointee Paul Volcker. As head of the Fed, he engineered an actual
reduction in the money supply, and broke the back of the crisis. Think of him
as the anti-Greenspan or the anti-Bernanke.
Greenspanism-Bernankeism reigns today, and that is the true tragedy of our
times. The Fed, the Treasury, the president, the regulators, and the Congress
have done everything possible to reflate, stimulate, stabilize, and counter
market forces. As expected, they have lost the battle. Unemployment is still
outrageously high, and inflation is working its way up yet again. But there
is an even more serious problem. In the course of stimulating the economy,
the Fed has created incredible amounts of fake money that it has stuffed in
the vaults of its best friends in the banking industry. And those phony
reserves seem now to be leaking out to cause horrific waves of price
inflation.
Those who blame Obama for this might consider
whether any Republican but Ron Paul would not have done exactly the same
thing. The Obama prescription for economic recovery was actually started
under George Bush – in exactly the same way that Hoover was the first
New Dealer. The problem is the man in the White House, to be sure, but he is
not the only problem. The core issue is that 1) we have a monetary and
banking system that is socialistic and therefore used by the power elite to
enrich themselves at our expense, and 2) the policy elite clings to the
Keynesian pretense that government is capable of waging a war against market
forces. That, and the fact that Keynesianism empowers the elite, is why this
pathetic and dangerous history keeps repeating itself.
In the market economy, there is a long-run tendency
for errors to be corrected and replaced by different practices that uplift
the people. In government, there is a long-run tendency to keep trying the
same thing again and again, no matter how often or how badly it fails.
Keynesianism is, after all, as Joseph Salerno points out, the "economics
of state power." And that guides us to the foundational problem: the
monopoly entity that rules and devastates society for its own benefit.
Llewellyn H. Rockwell, Jr
LewRockwell.com
Article originally published at
LewRockwell.com here
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