Downgrade: The Death of Keynesian Economics

Those of you who have ever taken an economics class probably learned like me to hate those graphs with all of those intersecting lines. To me, equilibrium was something that kept me from getting dizzy. Economic equilibrium had just the opposite effect on me. I wanted to run out of the classroom screaming as those graphs started spinning round and round.

One of the first words out of the mouth of my first economic professor was the name John Maynard Keynes, a British economist who died in the late 1940’s, and came up with some clever economic theories during the Great Depression. At that time, political, business and economic leaders were trying to make sense of what was happening in the world economies. Of course, they were looking in the wrong places. Much of the Great Depression was due to political reasons in Europe (the train track gauge from country to country was different, for example) and bad policy by the Federal Reserve Bank here in the states which continually upped reserve requirements for the banks to the point where over 90% of American currency printed by the Federal Reserve was being held in the banks.

Keynes, however, decided that what the world needed was a new economic theory. Communism and National Socialism (Nazis) were running amok in the world, and he attempted to come up with a theory that would allow the democracies to take a more activist role in their respective countries’ economy. Thus Keynesian economics was born.

It is not hard to understand. Keynes theorized that governments could circumvent normal business cycles by trying to achieve more efficiency in a nation’s economy. Although he admitted that if left alone, any problems in any economy would eventually correct itself in the long run, he also believed that in the long run, we would all be dead. This type of thinking during the Great Depression gave political cover to those who were caught up in the socialist utopian theories of the day without having to actually call themselves socialists. Massive government spending and debt in areas of the economy that needed correction was better than extended periods of displacement and discomfort. It would speed the normal correction along.

And it worked once. Keynes propounded his theories in the 1930’s, and the massive government spending resulting from World War II proved his point. My economics teacher was quick to point out that it was the huge deficit spending to build the war arsenal that ended the Great Depression. He was right. Massive spending on hard assets….tanks, airplanes, steel, concrete, trucks, jeeps, bombs and guns absolutely ended the Great Depression…and don’t forget all of those unemployed men enlisting or being drafted into the army. The economy was humming.

So American politicians decided that Keynesian theory was a winner, and it gave them an excuse to continue to meddle in the economy. If you were a leftist or a progressive or a liberal, you found your hero and justification to mold America into the place you thought it should be…a reflection in the social democratic eye of nations. Keynesian theory sanctified the ever increasing national debt.

Unfortunately, World War II was the only time Keynesian economics worked. Of course it worked…look at what they made with the money!!! But since then, government spending has been directed at everything BUT hard national assets. It has been directed towards social justice programs, welfare, entitlements…NOT roads, bridges, energy development, or as Obama has recently admitted, shovel ready projects that weren’t as shovel ready as he thought.

Less than 10% of Obama’s stimulus package went to those kinds of projects. What wasn’t sopped up the states to pay their bills and pension funds was directed towards liberal causes that produced little if any ripple effect through the economy. As one Democratic Congresswoman said: “We don’t need any more white blue collar construction jobs.”

Obama has now learned the hard way that is exactly what we needed. The downgrade by Standard and Poors, no matter how unjustified or justified it may be, is a stunning rebuke of Obama’s socialist policies hidden in the camouflage of Keynesian economics.

And it is not only Obama. Bush the 1st and 2nd, Carter, Johnson, Clinton, and to a lesser degree Nixon and Ford, all practiced Keynesian economics. Only Ronald Reagan saw it for what it was…a phony excuse to spend money where it ought not to be spent.

Those that practice Keynesian economics always forget one important thing. It’s not only how much you spend, it’s what you spend it on. The downgrade of American debt may finally mark the end of Keynesian economic theory. The country rejected it in last November's election. The European Union and the Euro are on the verge of collapse. China is attempting to end the dollar as the world’s reserve currency. Standard and Poors simply is telling us enough is enough.

Maybe Keynesian economics will be buried once and for all.