Saturday, June 12, 2010

Keynesianism On Its Deathbed

Future historians will look back on this era as a time when economists discredited themselves by clinging to a theory that's on its last legs.  That theory is Keynesianism.  Simply put, Keynesians believe a sizable enough macroeconomic stimulus can jumpstart a new economic cycle of growth.  People like Robert Reich just can't let go:

American Corporations are sitting on huge piles of cash but they're not investing, and they're creating only a measly number of new jobs. And they won't invest and create jobs until they know there are customers out there to buy what they sell.
(snip)

Keynes prescribed two remedies -- both of which are now necessary: Government spending to "prime the pump" and get businesses to invest and hire once again. And, as Keynes wrote, "measures for the redistribution of incomes in a way likely to raise the propensity to consume." Translated: Instead of big tax cuts for corporations and the rich, tax cuts and income supplements for the middle class.

Reich misdiagnoses aggregate corporate strategy.  Companies aren't sitting on cash because they lack investment opportunities.  They're sitting on it because they don't want to be caught without a recourse to pay their bills if the short-term credit markets (particularly commercial paper) freeze up again in a repeat of 2008's credit crunch.  The danger of a repeat increases with each passing day as the federal government's huge borrowing needs crowd all other debt offerings out of the bond market.

The Keynesian prescription of more debt and more stimulus is distorting the U.S. economy's ability to recover.  Let's put J.M. Keynes back in the ground and let him rest.  It's time to revive a much older and more venerable economic strategy:  austerity.