THE GLOBAL FINANCIAL
Kristie Pelletier and Michael S. Coffman, Ph.D
September 29, 2013
Part V—Failure of Keynesian Economics
The great achievements of civilization have not come from government bureaus… The only cases in which the masses have escaped from the kind of grinding poverty you’re talking about, the only cases in recorded history are where they have had capitalism and largely free trade. If you want to know where the masses are worst off, it’s exactly in the kinds of societies that depart from that. (Keynesian economics) Milton Friedman in a 1979 interview with Phil Donahue.
Annual median household income has dropped by 7.3 percent since the beginning of the Obama administration. Source: Reason Magazine
We are told we are in a recovery. Yet, unemployment is still well above seven percent, down slightly in the past year. However, this is primarily due to discouraged workers who want to work, but have dropped out of the labor force. If they were included, (called U6) unemployment would be over 14 percent. A July 2013 Gallup poll shows the unemployment rate to be even worse; over 17 percent underemployed. Since January, 2013, 77 percent of all jobs created have been part time.
Full-time employment is down by over five million since 2007, while part-time employment is at an all-time high. This represents a tectonic shift, primarily due to Obamacare. Total employment is 2.2 million below the 2007 level in spite of 13 million more people of working age. Job participation has plummeted to 63 percent, the lowest in 60 years. A Pew study revealed that 36 percent of 18 to 31 year olds are living in their parents’ home. Only 25 percent of that age group was married, down from 30 percent in 2007.
Growth of GDP hovers around a very anemic 1.7 percent – continuing the slowest “recovery” since WWII. After dropping since 2007, the trade deficit is increasing once again, nearly wiping out a 1.2 percent increase in consumer spending. Tragically, an AP study shows that four out of five U.S. adults now struggle with joblessness, near poverty or reliance on welfare for at least parts of their lives, a sign of deteriorating economic security and an ever more elusive American dream. Median annual Household income is down 7.3 percent ($4,000) since Obama took office in 2009, and down 5.6 percent since the so-called “recovery” began. Equally disturbing, median income just fell by 1.1 percent in a single month – February 2013 – after the Obama “recovery” has supposedly been in progress for years. That’s after $6 trillion in deficit spending to supposedly stimulate the economy.
The economic negatives continue, but you get the point; the so-called “recovery” is in name only for reasons described in Parts I-IV of this Financial Death Spiral series. This is a phantom economic recovery for the vast majority of families in America.
Is this the best progressive and Keynesian economics can do? It is pathetic. By any standard, the Keynesian model used by progressives does not work. Decades of proselytizing and mind-numbing analyses allegedly proving its superiority are incorrect! It has failed time after time for a very good reason – human nature.
Keynesian economics today is based on the ideas of early 20th century English economist John Maynard Keynes. The main plank of his revolutionary theory is the assertion that the aggregate demand created by households, businesses and the government and not the dynamics of free markets is the most important driving force in an economy. This theory further asserts that free markets have no self-balancing mechanisms that lead to full employment. Keynesian economists urge and justify a government's intervention, including deficit spending, in the economy through public policies that aim to achieve full employment and price stability. The goal, therefore of Keynesian economics is full employment. Understanding that is key to understanding why it generally fails.
Keynesian economics argues that private sector decisions sometimes lead to inefficient macro economic outcomes and therefore advocates active policy responses by government. Government, therefore, is the driver. Not the free market. This too is critical in understanding why it cannot work .Government interventions include large monetary infusions by the central bank and fiscal policy actions by the government to stabilize output over the business cycle. Like all economic models there are many variations to it and were used well before the name was coined in 1936 with the publication of Keynes’ book The General Theory of Employment, Interest and Money.
Ironically, Obama’s progressive/Keynesian failed approach has been tried many times in the past. President Woodrow Wilson (D) created the Forgotten Depression of 1920-21 after applying an early form of Keynesian economics. President Franklin Roosevelt put Keynesian economics on steroids. In one of the ironies of history, President Hoover’s opponent during the 1932 presidential race, Roosevelt attacked Hoover for taxing and spending too much, increasing the national debt, raising tariffs that blocked, trade thereby starting a trade war. Roosevelt even attacked Hoover for trying to “center control of everything in Washington.” Roosevelt’s running mate, John Nance Garner, went so far as to accuse Hoover of leading the country into socialism.
The irony is in the fact that Roosevelt’s New Deal actually did everything he accused Hoover of doing and so much more. The lesson learned is that this seems to be a hallmark of progressivism – accusing the opposition of doing exactly what the progressive is guilty of doing or will do.
While Hoover was partially responsible for creating the Great Depression, it was Roosevelt and the Fed’s monetary contraction based on Keynesian economics theory that effectively caused it. WWII got the U.S. out of that debacle, not Keynesian economics as proclaimed by progressives. However, because the Great Depression was such a disaster in the 1930s, the Fed, and its current chairman Ben Bernanke, has a near paranoid aversion to severely contracting the money supply in any economic crisis.
Next, presidents Johnson and Carter created the Great Malaise of the 1970s. President Johnson’s progressive “Great Society” program was based on the Keynesian economic model of government control and deficit spending. It caused President Carter’s stagflation in the 1970s and allowed the Bush/Obama enormous deficit spending in the 21st century. Now, of course there is the Great Recession of President’s Bush and Obama. All of these presidents were progressives of one sort or another and all used variants of Keynesian economics.
The Keynesian theory has evolved to say that the Fed should stimulate the economy as it is doing today as long as unemployment is persistently high, above the non-accelerating inflation rate of unemployment (NAIRU). NAIRU refers to a level of unemployment below which inflation rises .Without getting into the weeds, the theory goes that high unemployment absorbs monetary stimulus, preventing inflation. As the unemployment declines it eventually reaches the point where employment satisfies basic needs of the population. Continued monetary stimulus begins to compete for limited products and prices, which creates inflation. It is widely used in mainstream economics.
Progressive liberals claim the NAIRU has not been met since unemployment has declined from over 10 percent at the height of the recession down to the July, 2013 level of 7.4 percent, without causing increasing inflation. They cite the Consumer Price Index which has remained relatively flat at ±2.5 percent. However, there is a problem with this. As discussed in Part III of this Financial Death Spiral series, those unemployment and inflation numbers are entirely bogus. Keynesian progressives have corrupted both the unemployment and inflation calculations to mean whatever they want. So they are deceiving themselves as well as everyone else as to the real state the economy.
What the progressive liberals and the progressive mainstream liberal media won’t tell the American people is that much of the unemployment decline is because over a million workers have gotten discouraged and dropped out of the labor pool entirely since 2007. Nor do they tell the people that if the long-term unemployed were included, unemployment would be close to 24 percent – the same as the Great Depression. The fact that today’s unemployment numbers are deliberately skewed makes unemployment appear much lower than it really is. They also don’t tell you that the real inflation rate has increased from less than 2 percent at the height of the recession to nearly 13 percent in late 2011 before leveling off between 9 and 10 percent in 2013. The claims by the Obama administration, the liberal press and the progressive liberals, that things are getting better is simply false. In fact, it is a lie.
Whenever a Keynesian economic model variant has been applied to a crisis in the past 100 years it has failed; usually with very harsh or disastrous consequences for the American people. At best, it produces high unemployment, real inflation and economic stagnation – just like today.
Europe’s Green Energy Disaster—A Real World Example of Keynesian Economics
Obama’s unsupportable, ideologically driven commitment to green energy has real-world consequences as is clearly being demonstrated in Europe. Writing in the Financial Post, Benny Peiser, Director of the London-based Global Warming Policy Foundation warned:
Europe’s manufacturers, who are rapidly losing ground to international competition, have announced plans to expand in the United States. Instead of investing in the energy-expensive EU, they are pouring hundreds of millions of dollars into the U.S. where energy prices have fallen to a third of those in the EU, largely due to the shale gas revolution.
This is the price of having the government pick winners and losers in a progressive/socialist/Keynesian marketplace rather than one where an Austrian model marketplace itself picks the winners and losers. So far, Europe’s ideologically driven socialist governments have refused to exploit their own tracking opportunities. While not actually part of the theory of Keynesian economics, the fact that the Keynesian model is joined at the hip with progressivism/socialism, it allows the government to tell the citizens what they can and cannot have. In this case Europe chose green energy over fossil fuel and it has been a disaster bordering on cataclysm.
Since implementation began in 2004, the cost of electricity in Europe has skyrocketed by 60 to 70 percent. Britain’s cost is nearly twice that of the average for the U.S., and Germany’s is nearly three times as much. This has created a new class of poverty, called fuel poverty. Fuel poverty occurs when the cost of electricity exceeds 10 percent of the families’ annual income. In the case of Germany, Die Welt blasted the Merkel administration for woefully underestimating the cost of green energy: “Almost all predictions about the expansion and cost of German wind turbines and solar panels have turned out to be wrong – at least by a factor of two, sometimes by a factor of five.” The cost burden for consumers and industry of green energy has reached a “barely tolerable level that threatens the de-industrialization of Germany.”
In Britain, a new study reported by the BBC showed that during each of the four highest peak demands of 2010, wind output reached just 4.72%, 5.51%, 2.59% and 2.51% of capacity, according to the analysis. Worse, the study showed the average efficiency of wind is much lower than the promised 30 percent of rated capacity: “wind generation was below 20% of capacity more than half the time and below 10% of capacity over one third of the time.” The report said: “It is clear from this analysis that wind cannot be relied upon to provide any significant level of generation at any defined time in the future.” Although the wind industry denied these numbers, they are consistent with other observations.
A catastrophic tragedy was narrowly avoided on January 16, 2013 when another windless, bitter cold snap left Britain without enough electricity in its grid to warm a million homes. Had those homes lost their power, there is little doubt some people would have frozen to death. Fortunately, that didn’t happen because one recently closed oil-fired generation facility named “Fawley” was able to restart, along with a few other plants that had also just shut down. The power generating companies were able to barely make up the energy shortfall. Next year, Fawley and these other plants will be disassembled.
These are but a few of the overwhelming problems facing Europe’s green energy nightmare. Germany and Britain, as well as all the other socialist European nations, were warned repeatedly that their plans were totally disconnected from reality and these, plus many more, problems would happen. The socialists, who dominate European society and politics, scoffed at the warnings and forged ahead with their green energy future. They were absolutely confident green energy would overcome all obstacles. Now they are stuck with a disaster in the making.
Incredibly, instead of trashing their green energy programs, Germany and Britain are putting a band aid on the problem. Germany is building 20 coal-fired plants, and Britain is secretly installing diesel generators to take the load when their green energy fiasco fails to produce enough electricity. This is the height of absurdity. Wasn’t getting rid of fossil fuel energy their reason for spending hundreds of billions of euros on green energy?
The cost of Europe’s dalliance into green energy has been staggering. Says Peiser: “European consumers have subsidized renewable energy investors by a staggering 600 billion euros since 2004. Germany’s green transition alone may cost energy consumers up to a trillion euros by 2020.” Just who are these “investors?” They represent the very “big businesses” so hated by progressives/socialists. They got fat off the taxpayer’s sweat. This is called rent seeking. “This is the biggest wealth transfer in the history of modern Europe – from the poor to the rich,” explained Peiser. Says Peiser on August 10: “Green dreams are giving way to hard economic realities. Slowly but gradually, Europe is awakening to a green energy crisis, an economic and political debacle that is entirely self-inflicted.”
The Same Insanity Coming to America
It would be natural to believe that the hard lesson Europe is learning would be an example to the U.S. not to follow in their footsteps. Not so. If sanity had anything to do with progressive policy, Keynesian economics would have been put to death many decades ago. Instead, it is still the cornerstone of America’s economic policy and is still causing hardship for Americans.
In his climate change speech at George Mason University on June 25, 2013, President Obama proclaimed: “today, for the sake of our children, and the health and safety of all Americans, I’m directing the Environmental Protection Agency to put an end to the limitless dumping of carbon pollution from our power plants, and complete new pollution standards for both new and existing power plants.” This is needed he claimed, because “The 12 warmest years in recorded history have all come in the last 15 years.”
There are very few climatologists, if any, in the entire world who would agree with Obama’s outrageous statement. Obama is either being misled by his advisors, or is outright lying. Every climatologist now admits (including those in the UN’s IPCC) that science is actually showing that rising CO2 and global temperature show no, or even negative, correlation in the past 15 years. Furthermore, actual global warming temperatures and climate model predictions are also rapidly diverging. There simply has been no warming in the past 15 years.
Hundreds of peer-reviewed research papers refute the idea that man is causing global warming. However, if reported at all by the progressive mainstream media, it is merely a small paragraph deep in the newspaper or a one-sentence comment on the evening news. Claims that more than 90 percent of scientists believe mankind is causing global warming come from studies that have been fully discredited. A group of 20 ex-NASA scientists have concluded that the science used to support the man-made climate change hypothesis is not settled and no convincing physical evidence exists to support catastrophic climate change forecasts. A poll of 1,077 geoscientists showed that only 36 percent believe humans are causing global warming. The overwhelming majority do not. Another poll of meteorologists showed that only 25 percent believed in man-caused global warming.
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It does not bode well for the U.S. for the next three and a half years. Senator James Inhofe (R-OK) warned: “The President is waging an unprecedented war on fossil fuels that will destroy millions of jobs and prevent America from becoming energy independent... I am concerned the President’s policies will stifle much-needed economic growth. His greenhouse gas regulations alone will cost $300 to $400 billion per year.” More on the green energy fiasco in Part VI. Suffice it to say that it will destroy the U.S. economy as much as it has those in Europe.
President Obama knows about Europe’s utter failure, yet is committed to doing the same to American citizens.Is he deluded by his progressive ideology, or is he deliberately trying to destroy America? Five days before the 2008 elections, Obama proclaimed, “we are five days away from fundamentally transforming the United States of America!” With that goal, he has been amazingly successful – at a terrible cost to the American people.