Keynes is Dead; Hoover Lives

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Wednesday August 03, 2011 · 10:58 AM PDT

2011/08/03 · 10:58

Our nation has failed to learn from history. With the passage of the debt ceiling deal, we have once again attempted to balance the budget and cut spending in the midst of an economic downturn. How did that work out last time? Not well:

President Hoover feared that too much intervention or coercion by the government would destroy individuality and self-reliance, which he considered to be important American values. Both his ideals and the economy were put to the test with the onset of the Great Depression. Calls for greater government assistance increased as the U.S. economy continued to decline. Hoover rejected direct federal relief payments to individuals, as he believed that a dole would be addictive, and reduce the incentive to work. He was also a firm believer in balanced budgets, and was unwilling to run a budget deficit to fund welfare programs. By 1932, the Great Depression had spread across the globe. In the U.S., unemployment had reached 24.9%.

Hoover's focus on reducing the size of government hindered the economy in its time of need. We didn't actually escape the Great Depression until perhaps the most famous economist of all time, John Maynard Keynes, convinced our leaders to boost aggregate demand by increasing public spending. Needless to say his plan worked. In fact, its success was so prolific that Keynes is now considered the father of modern economics. Seriously, I hear about this guy pretty much every day in my classes.

Sadly we've taken a step away from the policies of Keynes and toward those of President Hoover. Republican concerns over our rising debt have caused us to cut $2.4 trillion in spending over the next ten years with $900 billion of that coming now (but hey, at least they didn't get cut, cap, and balance, right?). Don't get me wrong. There's definitely a strong argument to be made for trying to balance the budget, but you don't do it in a downturn. All that serves to accomplish is the suppression of aggregate demand, which slows growth, drives up unemployment, and hurts our business, families, and schools. It's logic from the 1930s; we should know better.

Our nation's investors have reacted poorly to the passage of the debt deal. The S&P 500 dipped more than 2.5% yesterday and it's down again so far today despite the fact that the agreement was supposed to rally the markets. And it's not only Wall Street that's going to suffer because of these cuts. Bloomberg is predicting that the bill will stifle economic growth next year and hinder consumer confidence...None of this is particularly surprising.

Maybe the passage of time makes people forget. Or maybe the Tea Party is just especially convincing. In any case, we're rapidly descending back to the cave man era of economics. We're focusing on the wrong problems making our real ones even worse. I'm frustrated, and I'm sure you are too. Well, at any rate, I'm off to go burn my old macroeconomics textbook; it clearly has no use anymore.

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