Sorting Out the News

by Burt on June 4, 2011

Well, the economic news is in, and it is grim. Unemployment is up. QE2 is not working. The stimulus didn’t work. The bailouts of Chrysler and GM are expensive, and GM stock tanked this week. What larger observations can we make? I have three.

First, Keynesian economics has failed again. During the 1930s, when we first tried it, we had a decade of double digit unemployment. Fortunately, Congress took the initiative and cut much of the Keynesian spending in 1945 and 1946, and unemployment finally went down (war employment doesn’t count as a long term solution).

Second, the bad economic news does NOT mean that President Obama will lose in the 2012 elections. President Roosevelt survived re-election during a dreadful economy in 1936 (in part because the economy had an uptick during election year) and 1940 (because the war issue trumped the bad economic news). FDR showed that a president can win in a recession/depression if (1) he can find a convincing scapegoat, and (2) if he can target enough money to enough voters. Roosevelt did both. The “economic royalists” were his big targets, and President Obama may also focus on rich people as the alleged source of the non-recovery. Keynesian politics is necessarily divisive politics, and often the key to re-election for the party in power is finding a culprit to blame for the recession.

Third, just because massive government spending has failed again to spark economic growth does not mean the spenders will admit their mistake, cut federal spending and tax rates, and watch American entrepreneurs enter the market to start and expand businesses. The belief that government spending is good for the economy is almost a religion, and most of its followers will not abandon their faith easily.

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