In 1936, John Maynard Keynes’ General Theory was published. His model of economic society fit perfectly with the prevailing economic policy of the Roosevelt Administration that was pumping up the size of the government in an attempt to exit the Great Depression that began in the U.S. in 1929. As a testament to the veracity of the model, the Depression, despite the introduction of the WPA program (Works Progress Administration), social security and a host of other mammoth programs, did not end until the beginning of U.S. entry into World War II in 1941.
The Keynes’ paradigm, which advanced the notion that the government, by its taxing and spending policy, could end an economic downturn or thwart inflation, was the dominant model of the executive and legislative branches until 1983 when Ronald Reagan assumed the U.S. Presidency. With the ascendancy of Paul Volker to the head of the Federal Reserve earlier in 1979, monetary policy, accompanied by supply side economic policies, became the dominant model of the U.S. economy post-Reagan. This model depended on lower marginal income taxes and aggressive money policy to stimulate the economy and end a recession. Between 1983 until 2008, Keynesian economics was dismissed as anachronistic and a failed policy approach. According to the monetarists, relying principally on the work of Milton Friedman, using the blunt instrument of the federal budget to manage the economy was problematic. Due to the time necessary to implement spending and tax changes, Keynesian economics was deemed useless in a fast changing economic world. Furthermore, growth in the size of the government, that normally accompanies implementation of Keynesian policy, thwarts economic growth.
However with the tidal wave of Democratic candidates in Congress and the likely success of Obama, the tired Keynesian model is resurfacing. Sadly, this year we have had one stimulus package passed with another on the Congressional table. The one passed and the one under consideration, will only serve to shift more resources to the government sector and reduce long-term economic growth. U.S. citizens should brace themselves for higher tax rates, elevated interest rates and slower growth accompanying this “return to the past.”