Our country was initially founded on the principles of limited government, individual rights, and personal responsibility. These principles, obviously, were meant to give more economic freedom to the individual to undertake, create, stimulate and innovate. However, since the Great Depression, this vision of personal responsibility has drastically changed. It has primarily changed economically with the economic theory of British economist John Maynard Keynes.
John Maynard Keynes argued that the best way to stimulate economic growth is by letting the government injecting more money in the economy at lower interest rates so that the masses could borrow more and spend more. And the very purpose of this economic approach is solely to stimulate demand in order to create supply. In other words, total demand by spending creates supply. It does sound good because the government puts more money in the hands of consumers. Who wouldn’t want to spend more? This approach to economics, although it may seem rational at first; is nonetheless unsustainable for two essential reasons.
The first reason is that it produces short-term gains. Indeed, during an economic recession, the government injects a significant quantity of money in circulation in order to stimulate the economy. It is called economic stimulus. However, printing an excessive quantity of money inflates the price of goods and services as well as it raises the rate of unemployment in the long-run. Yes! Keynesian economics does create unemployment. It creates employment on a short-term basis and unemployment on a long-term basis by allowing the government to impose regulations on businesses, which eventually decrease the demand for labor and increase the labor cost. The increase in labor cost makes it harder for private businesses to afford labor demands, and that difficulty in supplying labor increases the unemployment rate. For example, the unemployment rate under FDR was in the double-digit, precisely at 14 percent after his economic stimulus was implemented. During the first eight years of his presidency, however, the unemployment rate was at 18 percent before being brought down to 14 percent. The point is that when unemployment is in the double-digit, it means that the labor market is not doing great. In fact, we should be alarmed when unemployment is at 10 percent and above because the natural rate of unemployment is between 4.5 and 5 percent. FDR though was the first American president to use Keynesian economic theory to deal with the Great Depression. FDR may have stabilized the economy in the late 30s, but the galloping rate of unemployment and the augmentation of inflation rate in the 40s and 50s show that his economic policies were of short-term benefits and generated more unemployment in the long-run.
The second reason for the unsustainability of Keynesian economic theory is that it merely amplifies the power of government over economic affairs. The problem with government intervention is that it enables bureaucrats to literally manage the means of production of industry. By letting government having the power to control the quantity of money supply as well as the business cycle through regulations, Keynesian economic theory basically legitimizes central-planning economics on the one hand and constrains the freedom of individuals to make their own economic decisions on the other hand. When the government is in charge of managing the resources of an industry, it ends up mismanaging these resources because it raises the prices of goods and services within that industry and delivers a poor quality of service to the consumers. Innovation becomes stagnant and prices continue to rise although the productivity of that industry becomes motionless. A perfect example is Medicare and Medicaid. These two government-mandated programs are the downside of our national healthcare system. Prices of medical products and services under these two programs are expensive and their quality of service continues to deteriorate because their coverage only offers the bare minimum, which is, of course, not enough solve the medical issues of each person.
Let’s be real. Keynesian economics is an unsustainable economic theory that only makes government more powerful than it should be. But western governments still using it despite the fact that it has been proven to be a long-term deficient policy. Why western governments still use it then? Simply because it makes bureaucrats more powerful and gives them more leverage. Keynesian economics is doomed to fail regardless of the circumstances. The government spends the money it doesn’t have and ends up borrowing more than its needs. This excess of money borrowing creates inflation and that inflation makes the economy stagnant. I can basically say that Keynesian economics slows economic productivity on a long-term basis.