Keynesian Economics, GDP and Debt

The failure of Keynesian economics can be traced to a single error. GDP is seen as the singular measure of economic strength and well-being, which it is not. GDP measures consumption; and it's no secret that consumption can be made to rise through all sorts of unsound and short-sighted practices. So that while expansionary fiscal policy can raise the GDP, it does not add to economic health.

Over the long run (a side note to Mr. Keynes: Yes, in the long run we are all dead but there are our children to think of), Keynesian policies are disastrous. The ever-growing treasury market sucks investment capital out of the productive sectors of the economy, slowing economic activity to a crawl. As debt builds, interest rates rise, adding more to the debt and then more again to the interest payments. We saw this situation under the administration of Bush Sr.; and the economy only improved when the Clinton administration, by seriously tackling the deficit, convinced the investors that it was safe to invest in America, unleashing a flood of investment capital that created a vast economic boom.

So it comes as no surprise that, when Republican Keynesians (Bush and Republican Congress of 2001-2006) blew a huge hole in the budget through unneeded tax cuts on highest incomes, no prosperity resulted. Debt built again, sucking investment capital out of the economy and slowing economic activity. This debt is now a burden on everyone living now and everyone who is yet to live, and there is no excuse for it being there. Keynes was wrong - seriously wrong - and we are seeing the outcome of that even as we speak.

Where Keynes did have some sensible observation was in challenging the classical economics idea that people are driven by rational self-interest. He stated instead that much of the economic activity (he was speaking especially about Wall Street) is driven by "animal spirits"; and we certainly see some of that take place during the last decade. Burned by the collapse of the dot-com bubble, many people decided that real estate was a safer investment; so they speculated in real estate and drove up the housing prices at a time that no prosperity was being created, resulting in people's expenses growing while their salaries did not. And when that bubble burst, America had a great fall. The "animal spirits" here were not those of greed; they were those of fear. And it comes as no surprise that nothing good, and much wrong, resulted from people's indulgence in these "spirits."

This, as compared to the 1990s software boom, which created real prosperity and formed a huge industry that still exists. For a long time the "spirits" driving that boom were those of optimism and hope. Optimism, when unwarranted or excessive, can lead to negative outcomes as well, and we've seen that in 2000. But nothing that happened then begins to compare to the vast errors that took place in the last decade.

So yes, there were things that Keynes understood well, which is why he was able to amass a huge fortune through speculation in the stock market. But his main contribution has proven itself to be disastrous. Expansionary fiscal policy and deficit spending can raise consumption, but not economic well-being. And it is then left up to the younger people to clean up the mess that has come from this unsound indulgence in government debt.