It’S Time To Abandon Keynesian Economics

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President Obama came to Capitol Hill a few weeks ago to unveil his new stimulus package, a $447 billion “jobs plan.” The president’s idea is to pay for new government spending and temporary tax cuts by permanently raising taxes by $467 billion over 10 years.

The largest new tax in the Obama plan would cap income-tax deductions for small businesses and some individuals. As it happens, a Democratic-controlled Senate already rejected this proposal, in 2009, when the Democratic caucus had 60 members — a filibuster-proof majority. So there’s very little chance that it can pass today, when there are far fewer Democratic votes in Congress. Indeed, several key Democrats have already expressed skepticism about the new stimulus bill. President Obama surely knows this, raising the question of whether this may be more of a re-election plan than a serious jobs plan.

Whatever his motivation, let’s analyze the legislation on its merits. It is built on the premise of Keynesian economics, which was also the basis for the 2009 stimulus, Cash for Clunkers, and the 2008 stimulus checks sent out under President Bush. Keynesians believe that, when economic growth is weak or nonexistent, the chief problem is low demand for goods and services. In such circumstances, they recommend that the government spend money to stimulate consumption, arguing that businesses will respond by increasing production and creating jobs.

But this raises the question: Where does the government money come from? After all, Congress can’t merely print new dollars. Its funds have to be taken out of the private economy, either through borrowing or higher taxes. A paper from the Heritage Foundation compares Keynesian economics to the act of redistributing water in a swimming pool: “Removing water from one end of a swimming pool and pouring it in the other end will not raise the overall water level. Similarly, taking dollars from one part of the economy and distributing it to another part of the economy will not expand the economy.”

Moreover, raising taxes on small businesses to “pay for” the spending will reduce incentives to hire and invest. When you tax something more, you get less of it. A better idea is to incentivize production, or the “supply side” of the economy. The fundamental principle behind supply-side economics is that people work harder and take more risks when there are more opportunities for economic gain and less government intrusion.

Translating this principle into good public policy means reducing government consumption by cutting spending of borrowed money, thereby leaving resources in the private sector. It also means not raising taxes on anyone, and certainly not on the job-creating small businesses we count on to hire more workers.

Adopting supply-side policies would encourage robust job creation and investment. Doubling down on Keynesian stimulus spending is unlikely to have the same effect. Consider the historical record. In the Wall Street Journal, economist Stephen Moore compares President Reagan’s economy with President Obama’s: President Reagan inherited a sagging economy in 1981. By 1983, after his administration had implemented or supported a bevy of supply-side polices (including tax cuts, spending controls, deregulation, and sound money), economic growth had soared to 5 percent “and was racing to 7, even 8 percent growth.” Contrast that with President Obama’s record: As we approach his third year in office, economic growth is barely 1 percent, and some economists believe we’re heading for a double-dip recession.

The evidence couldn’t be clearer. It’s time policymakers consign Keynesianism to the history books and focus on supply-side policies that give job-creators the long-term certainty they need.

Sen. Jon Kyl is the Senate Republican Whip and serves on the Senate Finance and Judiciary committees. Visit his Web site at www.kyl.senate.gov or his YouTube channel at www.youtube.com/senjonkyl.

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