- Post 18 June 2012
- By Mark Uncapher
"Trickle down" economics has long been the favorite liberal jibe against policies intended to encourage savings and investment. Yet with the failure of Obama's economic policies, beginning with the 2009 stimulus, the same should now be more appropriately said of Keynesian economics.
President Obama's gaffe that "the private sector economy is fine" is revealing not just for that six word sound bite. The rest of his remarks are just as telling: "Where we're seeing weaknesses in our economy have to do with state and local government. Oftentimes cuts initiated by, you know, Governors or mayors who are not getting the kind of help that they have in the past from the federal government and who don't have the same kind of flexibility as the federal government in dealing with fewer revenues coming in."
His defense about why our economy is not performing is that governments, especially state and local governments, are not spending enough. Central to his Keynesian theory that an activist government can borrow and spend an economy out of economic downturn is the belief that such spending produces more of a "multiplier" than money left in the private sector. Keynes feared money retained by the private sector would be saved or used to reduce debt, rather than to increase demand. Taken to absurd limits, Keynes argued that government should pay people to dig holes in the ground and then fill them up.
Increasingly non-Keynesians have questioned the existence this supposed "multiplier effect." They observe that markets are less responsive to short-term measures in part they anticipate the withdrawal of the temporary policies. They also argue that government spending simply displaces resources that would available for other uses. The economy's underperformance for years after the stimulus program will provide ample data for a generation of PhD. candidates to attack the Keynesian "multiplier effect" theory.
Maryland Governor O'Malley has been a high profile cheerleader this Keynesian "trickle down" economics. The Governor has engaged in an ongoing debate with other Governors such as Christie of New Jersey, McDowell of Virginia and Walker of Wisconsin about state spending.
For three years now O'Malley has been channeling Hebert Hoover's Depression era claim that "Prosperity is just around the corner." Beginning in February 2009 after the stimulus passed, the Governor proclaimed "I couldn't be prouder of President Obama and the Congress for what they've done."
In October 2009 Governor O'Malley proclaimed "I cannot emphasize enough just what an importantly decisive turning point was exercised seven, eight months ago when [President Obama] pushed these recovery dollars through.....We can all debate about how quickly it is happening, how much more needs to be done, but the fact of the matter is our economy is doing much better than it was eight months ago, and it is going to be doing much better eight months from now."
Earlier this year O'Malley was still playing the same tune, saying that President Obama would fare well on the "central issue" of the economy, because the country was emerging from "the Bush recession" - with positive job-growth numbers and declining home foreclosures.
Just last weekend O'Malley echoed the Obama line, saying on Face the Nation: "The fact of the matter is, that the public sector continues to be a drag on the economy, because in 16 of the last 18 months we've had public sector job losses."
Despite all the evidence to the contrary, President Obama and his supporters such as Governor O'Malley continue to cling to their Keynesian theory that government spending is better than private, and that ever more government spending will "eventually" trickle down from government to the private economy.
Contrast the Obama's record with Ronald Reagan's. When he became President in 1981, he faced far worse economic challenges than Barack Obama did in 2009. Unemployment had soared into double digits with a peak of 10.8%. Reagan followed the exact opposite of the Keynesianmodel: spending reductions amounting to 5% in the Federal budget in 1981 and cuts to permanent tax rates to restore incentives for economic growth. By 1984 Reagan's success was convincing enough that he ran for reelection with a theme of "It's Morning Again in America."
That's why it is time to apply the pejorative "Trickle Down Economics" to the Keynesians model of increasing public sector spending in hopes that the private sector will eventually improve.