The Keynesian Stimulus Dogma

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Blindness to history.

The Keynesians' faith in deficit spending as the key to economic recovery represents a triumph of hope over experience.

Exhibit A: The massive deficit spending of Franklin Roosevelt in the 1930s didn't stop the Great Depression. In fact, despite FDR spending more money in his first five years in office than all 31 prior presidents combined, his Secretary of the Treasury Henry Morgenthau stated in 1939 that "[w]e are spending more than we have ever spent before and it does not work. ... I say after eight [sic] years of this Administration we have just as much unemployment as when we started ... And an enormous debt to boot!"

Exhibit B: The massive deficit spending of Japan's government over the past two decades has led to protracted economic sluggishness. Japan still limps along, but now the nation suffers from the largest debt-to-GDP ratio of the developed world at almost 200%.

Exhibit C: Last year's so-called stimulus plan has produced the same results as FDR's stimulus-stagnant employment and mushrooming debt.

The Keynesian economists have a huge blind spot when it comes to history. That is because they tend to view economic history as divided into two eras: the years since the Keynesian revelation (Dec., 1935, when the master, John Maynard Keynes, enlightened the world with his General Theory of Employment, Interest, and Money, and pre-1935 when all was supposedly darkness. They seem oblivious to the historical fact that, before Hoover and Roosevelt, Uncle Sam didn't ramp up spending during recessions /depressions, and those downturns were of shorter duration.

The most instructive example is the Depression of 1920-21, which featured the most rapid fall in production, employment and GDP in our history. Rather than trying to stimulate the economy, Presidents Harding and Coolidge slashed government spending in half. Markets made the necessary adjustments, the depression lasted for approximately a year, and employment and production made rapid, robust recoveries.

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