We're All Keynesians Now

"We are all Keynesians now," is a phrase that caught on in the late 1960s and early 1970s, variously attributed to Milton Friedman and President Richard Nixon. Uncle Milty was commenting on the general political/economic environment, not saying he was a Keynesian. Richard Nixon, on the other hand, actually said "I am now a Keynesian."

We bring this up because it's happening again. While we won't explain the entire theory of economics proposed by John Maynard Keynes, it was a "demand-side" belief system. A key tenant was using government spending, budget deficits, and loose money to let bureaucrats exert control over the economy.

After its failure in the 1970s, Ronald Reagan and Margaret Thatcher changed the world by moving it back toward a supply-side, small government mentality. The U.S. and U.K. moved from high inflation, high unemployment, and slow growth, to low inflation, low unemployment, and strong growth.

But, since the crisis of 2008, the commanding heights of economic control have once again shifted toward big government. Quantitative easing, zero percent interest rate policy (ZIRP), negative interest rate policy (NIRP), TARP, infrastructure spending, minimum wages, and new ideas for wealth taxes, free healthcare,...etc., have all been either proposed or tried.

The result? Ever since government assumed the high ground, global growth has slowed. Especially when compared to what it was in the 1980s and 1990s when government was reducing its role in the economy.

Does the consistent failure to create growth matter to those who are proposing bigger government? Absolutely not. They ignore it and call for even more government intervention.

Just this past week, Mario Draghi, in his last action as head of the European Central Bank, cut the interest rate it pays on excess reserves to -0.5% from -0.4%. But negative interest rates have been little short of a disaster. European and Japanese banks are suffering. Their loans and economic activity haven't budged. There is zero evidence that negative interest rates help economic activity, but plenty of evidence they hurt.