Saturday, March 13, 2010

John Maynard Keynes Theory of Debt-Financed Government Spending

By Douglas V. Gibbs

The philosophy of perpetuating massive government debt is nothing new. After the Revolutionary War, the new American government was in debt. The individual war debt of the states was voted to become nationalized, as were other debts that had been held by the states prior to, and during, the war. Once the state's debts became a national debt, there were those in the federal government that desired the government to pay down that debt as rapidly as possible, and there were others who wished to increase the public debt, seeing the strategy as an opportunity to buy votes by spending on government programs that would make the politicians popular with the people, while foregoing repayment of the debt to future taxpayers. The true amount and nature of the debt, however, was hidden by paying bondholders from the general revenues, making it difficult to determine how much of the taxes were going to repay deficits, national defense, the judiciary, or other programs. Meanwhile, the taxes were spread out over generations so that the massive debt would not be felt immediately by the taxpayer. Using such governmental schemes makes the government appear to be less costly, when in reality government spending is massive.

Eventually, however, such spending does eventually catch up with the politicians, as it did during the early years of this nation.

Taxpayers, after being burned by the politicians, become more aware of the schemes, and this makes politicians search for new ways to trick the people into supporting more big government programs.

Thomas Jefferson, aware of the theory of deficit spending, wrote in 1813: "It is a wise rule never to borrow a dollar without laying a tax in the same instant, or paying the interest annually, and the principal within a given term." Jefferson favored limiting government debt in such a way that it did not burden the next generation.

Problem is, once the floodgates of government borrowing were opened, there was no shutting them, for the politicians rapidly learned that "bringing home the bacon" meant more power for longer stretches of time.

As expected, however, the liberal economic strategies caught up to those promoting big government. The Federalist Era, which began in the late 1700s, saw a national debt that soared to a total of over $80 million. The interest alone, from 1790 to 1800, consumed over 40% of the national revenue.

Meanwhile, the Federalists passed the Sedition Act, which made it illegal to criticize government, in the hopes they would keep silent any dissent against their massive government spending. The Sedition Act, which considered any person speaking against the practices of the Federalist-led government to be "anti-government," allowed the politicians to continue to increase the size of government, and the government debt, while intimidating all opponents into silence.

In 1801, an election so close that the election was thrown into the hands of Congress, and was ultimately decided by one vote, Thomas Jefferson became president, and the Federalists lost power. The big government strategies of the Federalists ultimately led to the demise of the Federalist Party by the 1820s.

America had revolted against a tyrannical government once again, this time merely voting out the big government tyrants. The Federalist Party had died. However, the statism it represented lived on.

During President Andrew Jackson's presidency the last treasury bond was paid off in 1835. The United States was debt free, and actually ran on a surplus for two years. In 1837, however, an economic depression known as the Panic of 1837, led to increased deficit spending. By 1845 the national debt was back up to $16 million. President Polk's war with Mexico drove the national debt up to $63 million by 1848. Though a limited-government Democrat, President Franklin Pierce, brought the debt back down to $28 million, the Abraham Lincoln administration, partly due to the War Between The States, exploded the national debt to $2.8 billion by 1865.

Grover Cleveland vetoed more than four hundred spending bills, and used his limited-government philosophy to whittle the national debt down from $2.8 billion, to $1.2 billion by the turn of the century. The conservative economic policies of Cleveland's final term did not resolve the depression that began in 1893 fast enough as far as the voters were concerned, so McKinley from the Republican Party was brought into office. The depression eventually ended as all storms do. The death of McKinley by the hand of an assassin led to Theodore Roosevelt becoming president. A true progressive, under Roosevelt the size and scope of the federal government grew immensely, despite the limitations of the U.S. Constitution.

From there on out the progressives had a hold of American politics. Woodrow Wilson's philosophy of government ballooned the debt to $26 billion, and plunged America into the disastrous first World War. After the war, as the second decade of the century reached its end, a recession loomed on the horizon. President Harding "inherited" the recession, and immediately commenced cutting taxes and slashing spending. Harding's and Coolidge's limited government policies led America into a period of prosperity known as the "Roaring Twenties." Despite years of growth, however, the Hoover administration increased spending, raised taxes, and increased the national debt in the process. Then, Franklin Delano Roosevelt exploded the national debt to $260 billion by 1945. Despite all of his massive government spending, Roosevelt's progressive policies (The New Deal) did not end The Great Depression, and actually worsened the economic downturn, and made it last much longer.

By the beginning of the 1930s, a theory that repudiated the Jeffersonian view of limited government, as well as a limitation on the government debt, surfaced. The theory was created by British economist John Maynard Keynes, who made the case that debt-financed government spending could stimulate the economy and end the depression. Considering he was an intellectual member of the elite class, and a distinguished Cambridge University professor, the theory was embraced, and used to justify deficit spending.

Franklin Delano Roosevelt spent record amounts, and amassed obnoxious national deficit numbers, from 1933 to the beginning of the second World War, but it failed to end the Depression. The unemployment rate remained in double digits, and the growth of the American economy was non-existent.

The opposition to the Keynesian Economic theory argued that governments, like individuals, could not maintain fiscal behavior that included spending more than what was coming in. Spending more than one earns year in and year out will eventually conclude in bankruptcy, argued the fiscal conservatives.

Nonetheless, governments continued to welcome the Keynesian theory of economics, despite its obvious failures during the Great Depression. Governments continued to finance spending with borrowing, claiming that they were not transferring the costs of government to the future, as was the argument of their opposition. The result ultimately led to the United States embarking on a course of fiscal irresponsibility that ignored the U.S. Constitution, spending billions more than the federal treasury could afford year in and year out, creating a big government state that has continued on until the presidency of Barack Obama, who, not satisfied with the existence of the current Leviathan State, has decided to increase our national debt into the trillions in the hopes of pushing the American Form of Government to the brink of socialism.

Draining billions, if not trillions, of dollars from the private sector for the sake of expanding government is disastrous for any economy. The private sector is the sole source of production and wealth creation. Government produces nothing. Expanding government while shrinking the private sector always leads to economic stagnation and depression.

For the first time in history the number of people dependant upon the government for entitlement programs outnumber the number of people paying taxes. Meanwhile, the Obama Administration is increasing deficit spending at an astounding rate while attempting to increase the size of the entitlement mentality. Government continues to grow as the private sector continues to dwindle. This is unsustainable, and like the Keynesian theory that failed to solve the Great Depression, the current administration's attempt to "spend our way out of the recession," if allowed to continue, will not only end with disastrous results, but could ultimately lead to the economic collapse of the United States.

The Constitution is the Solution. Be involved, place Constitutionalists in government at all levels. United We Stand, Combined We Kick Butt. We still have time to stop the madness, but we must be involved, remain involved, and once the reign of the Democrats comes to a merciful end we cannot become complacent, but must demand that the Republicans maintain a conservative standard - or be voted out!

-- Political Pistachio Conservative News and Commentary

Invitation to an Anti-Keynes Project -

No comments: