Let's Bury John Maynard Keynes...

The 'Long Run' Is Here: Let's Bury John Maynard Keynes

By Victor Sperandeo

In an oft-repeated quote, John Maynard Keynes famously remarked that, “In the long run, we are all dead.” The only complication to this statement of course is recognizing when exactly death has occurred. Its inevitability is clear, but what about the possibility of life support? Due to the marvels of modern day science, we can literally keep a body “alive” for decades after it is pronounced clinically dead.

Put into present-day fiscal context, America’s financial balance sheet is on life support. The situation is critical. But, rather than face the problem and see what, if anything, can be done about it, our politicians and policymakers continue to use every single elixir they can concoct to make the patient appear alive, leaving the debt problem for future generations and a new crop of politicians. Their refusal to admit the crisis – to recognize the dire shape of the patient – only prolongs its brain-dead existence.

What is so misunderstood about Keynesian spending policies, and the consequences of accumulating even more debt, is the fact that a huge cost must be paid, just as the medical bills for the comatose patient continue to pile up. For example, if we assume a 6% average annual interest on the national debt over the next 30 years (which is approximately the average over the past 50 years), and the current stated total debt of $15.5 trillion, assuming no additional debt is created (an impossible dream scenario) the interest alone on the current debt will be $73.5 trillion over 30 years. This means the new total debt will be $89 trillion at that point, as the interest itself needs to be borrowed (and the principal will never be repaid). If GDP grows at 3% annually, and the U.S. collects its historical 18% of taxes of the $36.4 trillion 2042 GDP, this would bring in $6.6 trillion in taxes. After paying the 6% interest ($5.3 trillion) on the $89 trillion debt you have only $1.3 trillion for all other spending.

However, this calculation assumes spending does not increase at all over those 30 years (another impossible dream). To say this is unsustainable is redundant. The result is the death of the U.S. system as we know it. You can see how Keynes was brilliantly correct: in the long run we (and the country) are all dead.

The renowned Keynesian economists of modern day never address the critical question: Just how much debt is too much? In other words, “when do we file a death certificate?” Instead, they focus on “more demand” from increased spending and borrowing. And, if there is economic growth, they see it as “unfair” unless taxes are raised for purposes of “fairness,” which generally lowers or negates the growth in the first place.

The conclusion to all of this spending? A towering mountain of unpayable debt. The consequences of this mountain of debt? Higher taxes and inflation. The final result, historically, is a declining nation—a foundering ship which will never right itself, and the end result is what you see in the history of declining nations.

Let’s analyze this phenomenon. Spending is an expense. It is supposed to be for necessary and needy reasons. But “needs” are relative, and infinite. Wants and needs are interchangeable when the government is spending the money. Or, as John Hurt put it in the film “Contact”:

“The first rule of government: why build one, when you can build two at twice the price?”

This should be the key question to ask the electorate in 2012 (although it won’t be): what percentage of GDP should the federal government spend? 15%? 20%? Or should it be unlimited?

After all, government itself produces nothing. It’s an expensive middleman which transfers money from a few people to many people (for their votes), or from many people who work to a few special interests (for campaign contributions). In essence, it redistributes however necessary in order to purchase power.

In addition, the federal government also “protects” (and controls) the population though an estimated 562 agencies, commissions, and offices. These agencies are simply expenses that couldn’t occur without the fact that spending has no cap for any cause that suits politicians...

Read the rest here:
http://www.forbes.com/sites/victorsperandeo/2012/03/30/the-long-run-is-here-lets-bury-john-maynard-keynes/