Not surprisingly, the prospect of all this new spending (above and beyond the record spending increases during the past eight years) has triggered a feeding frenzy among special interests. Home builders, auto companies, road builders, state and local governments, the education establishment, the food stamp lobby, the green lobby, and alternative energy companies are among the groups fighting for a place at the public trough.
It would be easy to dismiss this orgy of new spending as the spoils of war. The Democrats won the election, after all, and now they intend to reward the various special interests that supported them. But that’s not a complete explanation. Some supporters of this new spending seem genuinely convinced that the federal government can create jobs.
In part, this is a debate about Keynesian economics, which is the theory that the economy can be boosted if the government borrows money and then gives it to people so they will spend it. This supposedly “primes the pump” as the money circulates through the economy. Keynesian theory sounds good, and it would be nice if it made sense, but it has a rather glaring logical fallacy. It overlooks the fact that, in the real world, government can’t inject money into the economy without first taking money out of the economy. More specifically, the theory only looks at one‐half of the equation — the part where government puts money in the economy’s right pocket. But where does the government get that money? It borrows it, which means it comes out of the economy’s left pocket. There is no increase in what Keynesians refer to as aggregate demand. Keynesianism doesn’t boost national income, it merely redistributes it. The pie is sliced differently, but it’s not any bigger.
The real world evidence also shows that Keynesianism does not work. Both Hoover and Roosevelt dramatically increased spending, and neither showed any aversion to running up big deficits, yet the economy was terrible all through the 1930s. Keynesian stimulus schemes also were tried by Gerald Ford and George W. Bush and had no impact on the economy. Keynesianism also failed in Japan during the 1990s.