A Brief Economics Lesson: Why Keynesian Policies Fail


Who can forget Nancy Pelosi declaring that investing in food stamps and unemployment benefits is the best way to spur the economy? They give us “The biggest bang for our buck,” she told us. Too many people, economists and reporters included, believe that all we have to do to stimulate the economy is redistribute some wealth from one group to the next. They cite with authority GDP and consumption statistics, as if how much we spend is a measure of how much we’re worth. (Imagine using such logic when it comes to your personal finances?) I don’t blame most people for believing it, as that’s pretty much all they hear. How often do you see guys like Dan Mitchell on the evening news?

“Keynesian policy is based on the fallacy that you can become richer by taking money out of one pocket and putting it another pocket, but this is a zero-sum game that appeals to statists and other redistributionists,” added Dan Mitchell of the Cato Institute. “Real economic growth occurs when we figure out ways to increase national income, which is why good policy means reducing the burden of government.”

Thanks to the Center for Freedom and Prosperity Foundation, now you can share simple lessons in economics with your friends and family. Here’s the latest explaining why Keyenesian economics doesn’t work.  The greater measure of economic activity is Gross Domestic Income (GDI), not Gross Domestic Product (GDP). GDP is a reflection of GDI, not the other way around. If there’s more income, there’s more money for people to spend. If we keep spending money we don’t have, eventually we’ll have to pay it back, thereby reducing income and discretionary spending.

Watch the video, CF&P does a much better job of explaining it than I do.

Click here for more videos from the CF&P Economic Education Series

Related: By now you’ve heard about the recommendations of President Obama’s fiscal commission. Dan Mitchell read the report, and isn’t happy with what he found.

The Chairmen of President Obama’s Fiscal Commission have a new draft proposal that is filled, according to Reuters, with “sharp spending and benefit cuts.”

That’s music to my ears, so I quickly flipped to the back of the report in hopes of finding hard numbers showing that the federal government will be smaller in future years.

Much to my chagrin, it turns out that the federal government will increase by about $1.5 trillion between 2010 and 2020 according to the Commission’s numbers. Here’s a chart based on the data from page 57.

Be sure to read the whole thing. They keep saying they want to reduce spending and reduce the deficit, yet they recommend increasing the size of government each and every year. It’s nuts.

Most of us don’t have the option of spending other people’s money. That’s all the government spends, and they aren’t very good at it.

Think about this – a dollar left in the private economy is a dollar. A dollar taken by the government to redistribute to another party is far less than a dollar when it finds it way back into the economy. Why not leave that dollar in the economy in the first place. Who knows, maybe some smart entrepreneur or investor can turn it into a dollar and a half or two dollars, rather than the quarter we’d get back from the government? While on the subject of dollars, if the government continues printing and borrowing money to continue the spending spree, that dollar is going to be worth a lot less no matter where it winds up.