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The Center for Freedom and Prosperity has another in its Econ 101 video series, this time showing why Keynesian economic policies generally fail to generate sustainable economic growth. The nature of Keynesian interventions target the wrong component of the economy, consumer spending, which AEI’s Hiwa Alaghebandian shows as a consequence of growth more than a specific origin of it. Consumer spending rises when income rises — which can result from enhanced consumer spending, of course, but only if organic in nature. Otherwise, the Keynesian interventions of massive borrowing and government spending not only fail to sustain themselves as we have seen with Porkulus, they also end up reducing future income with heavy debt loads, which will depress spending in the long run:
Think of it as a Cash for Clunkers economic plan on a larger scale. The intention is to fool people into spending money in order to give the illusion of growth, and have that illusion somehow become reality through a process best known as FM; the M stands for “magic,” and you can guess what the F means. The problem is that the interventions run out of steam quickly without addressing the actual issues of income and asset value that drives organic consumer spending. Instead of increasing the size of the pie, we just cut it in different shapes.
The policies implemented in the early 1980s, in contrast, focused on generating growth in investment and income by reducing the government’s role in the economy and their bite out of it. That approach succeeded in long-term growth and prosperity by increasing the size of the pie. Critics scoff at this as “trickle-down economics,” but as the last two years showed, the Reagan approach worked while Keynesian Obamanomics has mainly generated nothing but short-term gimmicks and long-term stagnation.
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