Old Keynesians never die, they’re resurrected with every new Administration
Here is a question for Washington’s Keynesians: If uninhibited deficit spending is the key to economic growth, how could the Bush administration’s galloping budget increases and unbroken string of deficits have left the economy in recession? If Keynes was right, why didn’t the enormous growth of government outlays stop the Great Depression in its tracks? Federal spending exploded under Herbert Hoover and exploded even more under Franklin Roosevelt, during whose first two terms the federal budget more than doubled. Where was the “stimulus” such furious expenditure should have produced?
Incredibly, the lesson Obama draws from history is that past administrations didn’t spend enough. In his meeting with House Republicans last week, he argued that FDR should have thrown open the sluices even wider. “The real problem was that Roosevelt slowed down on public spending in the first two years,” the president said, according to one congressman who was in the room. “If he’d just kept on spending that money, we’d have gotten out of the Depression quicker.”
There may be no reasoning on this subject with Obama, who has already raised the possibility of “trillion-dollar deficits for years to come.” But reality is not optional: You do not become more prosperous by writing yourself a check. Economic growth is the result of creating new wealth, not redistributing existing wealth. The federal government cannot conjure prosperity out of thin air. Any money it spends - whether on highways or Pell grants, Medicaid or tax rebates - it must first tax or borrow from somewhere else. A trillion dollars pumped into the economy tomorrow is a trillion dollars siphoned out of the economy today - a trillion dollars no longer available to the private sector for investment or consumption. Enlarging Washington’s spending power will not enlarge the economy.
Six years into FDR’s presidency, his Treasury secretary (and close friend) Henry Morgenthau Jr. ruefully acknowledged that the New Deal had proved an economic disaster.