An Analysis of the Unintended Consequences of Keynesian Economics

The U.S. is finally experiencing the repercussions of the past 55 years of economic policy.

The political consequences are seismic.

Nick Eberstadt, in his book Men Without Work tells us that the percentage of working-aged men outside the workforce rose to 22% last year from 10% in 1965.

In addition, Eberstadt reported that there are millions more who are underemployed.

Furthermore, the employment-to-population ratio for men in the ages from 25 to 54 is lower today, 6.8% lower than even in 1930 during the Great Depression.

These figures point to the fact that there is a structural problem in the United States economy, one that fully raised its head in the recent election.

This structural problem has arisen because of the government's reliance upon an economic philosophy that is out of date. It has resulted in unintended consequences that are hurting the people the policies are supposed to be helping.

The philosophy is that of early 20th century economist John Maynard Keynes and stems from his theories about macroeconomics and the use of fiscal policies to reduce unemployment in an economy.

Keynes' economic philosophy became more widely known during the presidency of John F. Kennedy. Kennedy had campaigned "to get America moving again."

The head of the President's Council of Economic Advisers was Walter Heller, a prominent Keynesian economist.

The initial thrust of this program was a tax cut, ultimately signed into law in 1964 by President Lyndon B. Johnson.

The original idea of Keynesian fiscal stimulus was to combat recessions and return people to work in the jobs in which they had been employed before the recession hit.

By the mid-1960s, this approach was extended beyond the recession and was aimed at enhancing economic growth and lowering unemployment rates in both good times and bad.

The underlying empirical relationship that justified having fiscal deficits in both recessions as well as in non-recessionary periods was the Phillips Curve that showed a trade-off between inflation and unemployment. That is, lower levels of unemployment could be achieved at the price of a little more inflation.

President Richard Nixon accepted this approach to economic policymaking, and this philosophy of government fiscal stimulus ha been generally adopted by presidential administrations. Politicians liked this approach because proposing short-term programs of fiscal stimulus to combat unemployment helped them to continually get re-elected.

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