Keynes Was Wrong: Bigger Government Does Not Boost Growth

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Keynes Was WrongBigger Government Does Not
Boost Growth

• Cato Hill Forum, December 18, 2008

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Keynesian Theory

• Government should inject money into the economy
  to boost aggregate demand with deficit spending
  (or tax rebates).
• This will prime the pump or jump start growth
  as the money begins to circulate through the
  economy.

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Real World Evidence

• There have been many Keynesian episodes, most
  notably the 1930s under Hoover and Roosevelt.
• On a more modest level, Gerald Ford and George W.
  Bush tried Keynesian policies.
• Japan was Keynes-land in the 1990s, with special
  emphasis on infrastructure.

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The Hoover-Roosevelt Experiment

• Both Hoover and Roosevelt increased tax rates.
• Both Hoover and Roosevelt increased government
  intervention.
• Most importantly, both Hoover and Roosevelt
  dramatically increased government spending,
  financed by debt, as Keynesian theory suggests.

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Hoover and Roosevelt Failed

• Unemployment averaged more than 17 percent during
  the 1930s.
• GOP in 1940 was still below the 1929 level.
• In 1939, Treasury Secretary Henry J. Morgenthau
  Jr. testified before the House Ways and Means
  Committee "I say after eight years of this
  Administration we have just as much unemployment
  as when we started And an enormous debt to boot"

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Recent Keynesian Episodes

• Gerald Fords tax rebate in the 1970s.
• No positive impact on the economys performance.
• The 2001 and 2008 Bush rebates.
• No positive impact on the economys performance,
  unlike the good results from the 2003 tax-rate
  reductions.

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Japan Keynes-land

• Japans experiences in the 1990s show the wrong
  way to do things (not only on spending, but also
  on bubbles).
• Numerous stimulus schemes.
• Massive infrastructure program.
• Pure Keynesian experimentleading to no positive
  impact on growth.

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Conclusion

• There is no free lunch.
• More spending does not work.
• Tax rebates and tax holidays do not work.
• The only good short-run policy is good long-run
  policy.
• Government causes problems rather than solving
  them.