Why Keynesian economics is wrong

Progressive economics (and, sadly, the economics of some otherwise sensible Republicans) is based on the idea that, in an economic downturn, one relies on government spending to increase domestic consumption in order to stimulate the economy. Sadly, as the history of the 1930s, 1970s and, now, the early 21st century shows, that really doesn’t work. In this video from the Center for Freedom and Prosperity, the AEI’s Hiwa Alaghebandian explains how Keynesian economics, and thus the entire economic policy of the Obama administration, has it all backwards:

As her former internship supervisor, Dan Mitchell, writes:

The main insight of the mini-documentary is that Gross Domestic Product (GDP) only measures how national output is allocated between consumption, investment, and government. That’s useful information in many ways, but if we want more output, we should focus on Gross Domestic Income (GDI), which measures how national income is earned.

Focusing on GDI hopefully would lead lawmakers to consider ways of boosting employee compensation, corporate profits, small business income, and other components of national income. Focusing on GDP, by contrast, is misguided since any effort to boost consumption generally leads to less investment. This is why Keynesian policies only redistribute national income, but don’t boost overall output.

The analysis in this video also helps explain why Obama’s so-called stimulus was a flop. The White House genuinely seemed to think a bigger burden of government spending was going to create jobs, but the real-world numbers show higher joblessness.

The basic idea is that increased income leads to increased consumption, not the other way around. One would think this would be common sense, but that apparently assumes a level of economic literacy all too uncommon amongst our policy-makers.

LINKS: MEP Daniel Hannan sums it up in 11 words.

Via International Liberty

(Crossposted at Sister Toldjah)

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