Where the economies of the world are heading based on its Keynesian mantra of C+I+G is still anybody’s guess but a very hard fall is not out of the question. The US economy is the dead centre of such policies with easily one of the most economically incompetent administrations in American history – possibly the most incompetent ever – making decisions in tandem with a Democrat controlled Congress which has not introduced a budget in something like 765 days. They are too frightened, apparently, to let anyone else see what they have in mind.
Two bits have come up today that are worth bundling. The first is from Tim Congdon writing in the English magazine Standpoint. In an article on “Expansionary Contractions”, that is, on how cutting public spending actually leads to growth, he writes about how Keynesian economists continue to press for more spending:
Economics may not be a science, but — in their view and that of other Keynesians — the lessons of textbook theory are straightforward and uncontroversial: cuts in public expenditure and reductions in deficits have deflationary effects.
But what about the evidence? The historical record turns out to be fascinating. The last 20 years of UK statistics provide a decisive refutation of the [Keynesian] position. They contain two lengthy periods in which fiscal policy was consistently moving in one direction. According to data from the International Monetary Fund, between 1993 and 2000 the UK’s cyclically-adjusted budget position was transformed from a deficit of 6.1 per cent of GDP to a surplus of 1.5 per cent. Every year was “deflationary”, in Keynesian terms, in this seven-year period. Yet the economy enjoyed strong growth and falling unemployment.
By contrast, from 2001 to 2009, the cyclically-adjusted budget position slithered from a surplus of 0.6 per cent of GDP to a deficit of 8.5 per cent. With two minor exceptions, every year was “expansionary”, according to Keynesian terminology. And what happened to economic activity over these eight years? The answer is that, whereas in 2001 the UK was as near to full employment as it had been for a generation, by 2009 it was suffering from the after-effects of the worst recession since the 1930s. Again, the Keynesian view is contradicted.
And then, via Powerline once again, we find an article on the Canadian experience. With no economic theory to guide them, certainly no theory found in any standard economic text, the Canadian government spent the last sixteen years cutting spending and moving the budget towards balance with immense success. There are two morals that were drawn, the first being that deficits can be cut through cuts to spending rather than increased taxes. And then this:
The second moral is that the Canadian experience does not support the Keynesian view that one should not cut government spending during an economic slowdown. The Canadian experience, just like the U.S. experience during the 1920-21 recession and in the first two years after World War II ended, shows that cutting spending even during low-growth years is good for long-term economic results.
But why go to Canada or the UK? We have had the experience right here in the economy managed by Peter Costello. I used to say while we were in the midst of those budget surpluses and regular cuts to personal taxation that no one would understand why it had been so successful and therefore when they stopped no one would do it again. Once again we find that the only thing we learn from history is that no one ever learns from history.