Why Keynesians Keep Getting It Wrong

Those who heaped high praise in Keynesian policies have grown silent as government spending has failed to bring an economic recovery. Except for a few diehards who want still more government spending and those who make the unverifiable claim that the economy would have collapsed without it, most now recognize that more than a trillion dollars of spending by the Bush and Obama administrations has left the economy in a slump and unemployment above 9%.

Why is the economic response to increased government spending so different from the response predicted by Keynesian models? What is missing from the model that makes their forecasts so inaccurate? There are four reasons for this miscalculation on the part of our leaders:

1) Big increases in spending and government deficits raise the prospect of future tax increases. This scares off investors.
2) Government spending programs redistribute income from workers/producers to the unemployed. This precludes an effect that would increase productivity. Unemployed people are less likely to be the ones to increase productivity.
3) Keynesian methods increases governmental regulations, and that increases costs without an increase in useful production.
4) The estimated cost of new jobs in President Obama’s latest jobs bill is at least $200,000 per job based on administration estimates of the number of jobs and their cost. How can that appeal to the taxpayers who will pay for those costs? Once the subsidies end, the jobs will likely end, too.

We have spent nearly a trillion dollars and have nothing to show for it in the form of new jobs. All we have is a bunch of IOU’s. Throwing a lot more money into this fiasco (in the form of President Obama’s jobs bill) and expecting a different response seems stupid to me.

This blog post was partly redacted from the Wall Street Journal 28 October 2011, page A17.