Despite the overwhelming amount of commentary about the Great Depression and the recently labeled Great Recession, the United States has survived twelve or more panics, crashes and recessions since its founding in 1776. From the land speculation bubble of 1796 to the beginning of the Great Depression, the political answers to these troubled times was, for the most part, to allow the fiasco's to run their course. Allow the market to fix the problem. Sure, the government put people in jail, others skirted to the hills to save themselves from the vicious mobs who trailed them but overall the government did not intervene with stimulus. The purpose seemed to be that the government wanted society to learn from its missteps despite how painful it may have been.
It was not until the Great Depression when Lord Keynes advocated for ‘temporary' deficit spending by the government to help fuel business investment that government intervention became so popular. Up until the Great Depression of 1929, the United States ran a national debt that was typically about 15-18% of GDP. Post the Great Depression, this number climbed to about 120% in 1946 and 1947 just after World War II. The estimated national debt as a percentage of GDP is expected to be about 102% as of 2015, up from 55% or so in 2000.
What seems to have happened since the introduction of Keynesian economics is the strange idea that running a fiscal deficit is a good thing for a country because it will spur business investment spending and keep unemployment low. Unfortunately this magic has not materialized. The unemployment rate in the United States is still relatively the same as it was in 1930; running about 5% (when not in a recession) and the national debt is just about out of control.
In economic parlance, we call this situation a moral hazard. Since the public acceptance of Keynesian economic theory, politicians have used the tactic of running deficits to help fund special interest groups and party loyalists who in turn will vote for them in the next election. This same tactic is being used by President Obama and his administration, yet with a potentially and substantially worse outcome.
Even if Keynesian economics was a viable solution in fixing our current situation, there are three main attributes that are necessary. First, the deficit spending or stimulus should increase the number of private jobs, which in turn will provide more income to taxpayers — hoping to raise tax revenues to offset the stimulus. Second, the stimulus should be accompanied with pro-business rhetoric giving businesses comfort that they will not be penalized for success. This does not mean that the government cannot prosecute or imprison imposters and thieves. Third, government stimulus should not be offset by state and local tax increases or job eliminations.
Unfortunately, the manner in which the Obama administration is implementing its Keynesian plan is not meeting the three rules outlined above. For instance, the majority of the stimulus is being used to create public government jobs which will need to be paid from future tax revenues. Next, the administration has been anything but pro-business. The Financial Reform Bill and the Healthcare Bill are both creating levels of uncertainty that have not been seen before — at least not in my lifetime. What is most troubling about these bills' is the unknown impact they will have on businesses in the next few years. Will they help? Will they hurt? Who knows? Last, most states and municipalities are feeling the impact of the recession and because of this are acting in a way that counteracts the fiscal stimulus of government. Take for example New Jersey with its $10.7 billion dollar deficit. Governor Chris Christie, acting prudently has made hard decisions and has cut costs across the board. The impact will ultimately reduce the level of government employment at the state level and or reduce spending for vendors and others who provide services to the state.
When looking at the Obama plan in this manner and observing the plan against Keynesian economic theory, it appears that the plan is unintentionally set to fail. The potential benefits of the federal deficit (stimulus) is offset by a regulatory environment that is causing great levels of uncertainty, state and municipal budget reductions which will increase unemployment and reduce contracts to the private sector and the stimulus is creating public sector jobs, which will only increase the overall future tax burden.
It appears as though there is little to no benefit coming from the Obama Plan. The plan does not address the skyrocketing national debt that has been increasing since the introduction of Keynesian economics in 1929; it will not significantly decrease unemployment and in the long run will only further increase the private sectors responsibility to pay for out of control and over indulged government programs.
I could only imagine where we will be in 15 years if we continue to allow government officials to pull on the strings of irresponsible Keynesian policy every time we face a setback. We lived without Lord Keynes from 1776 to 1929 and did just fine. I think it is time to get back to our roots of fiscal responsibility, balance the budget and remove the entire national debt in a planned and controlled course of action.
We can pay for our past fiscal sins today and live within our means or we can wait until tomorrow. The only downside is tomorrow may be too late and cost too much.
Christopher W. Young is a professor of economics at Seton Hall University and managing director of M&A at Berkery Noyes in NYC.