Despite a few surprising economic nominations, the new American administration continues to signal its determination to take us back onto the shining path of Keynes. The British economist’s ideas how to “cure” the Great Depression earned him the title “Savior of Capitalism.” The result from the pain and the flawed theory of the 1930s is today’s ignorance about the impotence of fiscal policy. The Keynesian way was tried without much opposition for half a century in the United States, Western Europe, Japan, and many developing nations. Far from “smoothening out” the business cycle, it proved to be a major source of instability for those economies.
That people do not learn from history is obvious from the current administration’s farewell “stimulus package”—gifts to small consumers and big business. During the next four years the Treasury Department is even more likely to magic out of the pockets of our great-grandchildren billions and billions of dollars. And it will likely go with just the occasional half-hearted ideological resistance from the Republican minority. In 75 years Americans have grown used to expecting their government to reward sloth and inefficiencies, to bail out the irresponsible and the stupid, and to punish profitable activities with high taxes.
Intellectuals, policy-makers, and even Joe the Plumber—they all have subscribed to the idea that the existence of booms and busts calls for federal interventions to absorb capitalism’s “historical tendency to overproduce.” Two hundred years ago Jean-Baptiste Say explained that pervasive gluts (or shortages) are only possible when prices are not free to adjust to reflect changes in costs and tastes. Stimulating “demand” in a world of greed is as stupid as it gets.
One-time boosts from Uncle Sam will not inspire consumer confidence. Very few of us will buy more stuff as a reflex to the IRS’s sporadic “charity.” A long process of trial and error has taught us that the extra cash coming our way now will be siphoned off later through systematic taxation. And there is no way for the enacted and planned bailouts to incentivize our businesses to become more competitive or consumer friendly. If you want to help—look on the supply side.
Following Say’s economic principles worked under Ronald Reagan. It terminated the vicious cycle of stagnation-inflation-stagnation from the previous decades. It paved the way for the amazing expansion of the 1990s. Something to do ASAP: Replace the IRS loopholes with permanent tax cuts for long-term investments on Main Street. Bad news: It’s not a painless quick fix. It is a solution, which demands perseverance through a few really tough months. Will the new government have the guts?