Why Keynesian Economics Always Fails.

In 1965 Time Magazine cover was the title "The Economy: We Are All Keynesian Now." It really didn't matter if you were a Democrat or a Republican, they both ascribed to the Keynesian theories of economics. Our Universities have for decades nearly taught these exclusively, with some Marx thrown in, in later years more and more Marx thrown in. What is Keynesian economics we hear so much about?

In the 1930's, Lord John Maynard Keynes predicted that someday everyone would have a four-bedroom house, at which point, the American Dream having been fulfilled, people would lose their incentive to work. Keynes believed that peoples' affluence would eventually outstrip their appetites - that their demand for goods and services would reach a plateau, beyond which the amount of money they spent would represent a smaller and smaller percentage of their incomes. Therefore, he argued, the government would have to adopt fiscal policies designed to keep people from hoarding too much of their incomes. `This can be found in Keynes "The General Theory of Employment, Interest, and Money." This was why our government developed a progressive income tax, to keep you having to work harder.

It is hard to believe that was a theory anyone every believed, no less that even today, we are still finding the bulk of politicians, academia and the media that are pushing it. It seems so much of what we as a society do is more based on tradition than any thought through idea. Today, it is clear that nothing could be further from the truth of people stop wanting more after basic needs are satisfied. Indeed, we know it to be the exact opposite of what Keynes predicted. Just look at the spending habits of American consumers, they are insatiable. The more we earn, the more we spend; the more we spend, the more we get; the more we get, the more we want, and the more we want, the harder we seem to work to earn more money to get it. If any segment of society has lost the incentive to work, it is the poor, not the upwardly mobile and middle class.

What happened to confound Keynes's prediction that increasing affluence will lead to decreasing consumption? In part, Keynes got tripped up by a basic misunderstanding of human psychology. Improving prospects breed rising expectations, not complacency. Thus, as John Kenneth Galbraith noted in 1958 in his book "The Affluent Society," "In the affluent society, no sharp distinction can be made between luxuries and necessaries." Galbraith was talking mainly about consumer psychology as used by advertisers to play on consumers' insecurities, envy, and self-esteem to make them want things they don't really need: or as imposed by consumers upon themselves. Consider, for example, how buying a luxurious new suit makes a consumer feel he must have an equally luxurious silk tie, a fine linen shirt, and pair of Italian leather shoes to match. And once he has added this to his wardrobe, his less expensive suits, shirts, ties, and shoes look dreary and he wants to replace them with the better quality as well. If she was driving a Toyota then she wants his and hers, then they want to trade up to a Lexus, then two, and so on.

Add to that what technology advancements do by providing an ever expanding array of astonishing new products, the use of which changes our behavior to an extent that before long what was once a great luxury is now an everyday necessity. So the very economic system that our Establishment politicians, our academics and our business media keep pushing, the one they were all raised to believe is built on a false premise that has never ever worked. What has worked is a more Alchemic approach to economics, where the money is left in private hands, both in business and consumer hands to spend and invest as they like. That is the power that fires the engines of the economy. As John F. Kennedy said, "A tax cut means higher family income and higher business profits and a balanced Federal budget...as the national income grows, the federal government will ultimately end up with more revenues. Prosperity is the real way to balance our budget. By lowering tax rates, by increasing jobs and income, we can expand tax revenues and finally bring our budget into balance."

Throughout history, every time we reduce tax rates significantly we increase the economy and that increased economy actually creates record revenue into the national government in taxes. The reverse is also true, whenever we raise tax rates the economy slows, business people and individuals start spending more time and resources to shelter their existing income rather than try to grow more and the tax revenues to the government actually shrinks.