The U.S. Economy and the Failure of Keynesian Thought

We have enough data, including the November figures, to conclude that the U.S. economy continues to stagnate, that price inflation is far from being under control, and, more significantly, that Keynesian policies do not produce the effects its promoters believe they do.

Adjusted for inflation, November’s retail sales are down 2 percent compared to one year ago. Since March 2021, electronic and appliance store sales have shrunk by 21.5 percent, and various ports around the country have seen their loaded imports drop significantly; Los Angeles is down by 24 percent compared to November of last year.

Government politicians have been boasting about a sturdy recovery since the pandemic. In many cases, economic activity has returned to pre-pandemic levels after a surge due to the end of the lockdowns and the trillions of dollars of stimulus money that temporarily distorted consumption patterns (a surge that, in turn, followed the precipitous drop produced by the lockdowns). 

From March 2021 to November 2022, e-commerce, which had seen a major spurt prior to that as people stopped going to shops and had to order online, dropped 1.7 percent. Since March 2021, furniture and furnishings sales have been down 13 percent after soaring almost 200 percent in the previous year for the reasons just mentioned. For its part, industrial production is more or less where it was in 2018.

The Keynesian idea, adopted by the U.S. government and many other countries, that by artificially stimulating consumption in hard times you spur economic activity all around on a sustained basis has proved to be fallacious yet again. Donald Trump and Joe Biden stimulated the economy with a combined US$6 trillion. The result, except for a brief and exceptional recovery period, is that the economy has ceased showing robustness. The opening of the food services sector combined with the stimulus showered on consumers has obviously given some impulse to this particular industry (it has grown about 5 percent), but where is the effect on the rest of the economy? 

Those who maintained that the current inflation was due to the dynamism of the post-pandemic recovery have a problem. How do they explain the ongoing inflationary process in the face of the statistics mentioned above? 

Inflation continues to be felt across America even if some politicians point to indexes such as the PCE deflator to insist that it is down to 4.8 percent. Essential items that affect the lives of ordinary folks are excluded from this index, including grocery store sales (up 12 percent year on year) and energy (up 13 percent). More likely, inflation has to do with massive fiscal spending and monetary printing. As David Stockman pointed out in a recent newsletter, before the end of the gold standard, the ratio of total debt (including government and private debt) to gross domestic product was about 1.5, and at more than US$90 trillion, it is now 3.6.

The worst part is that, despite efforts by the Fed to contain and hopefully reverse the monetary flood of recent years, fiscal spending continues to be totally out of whack with government revenues, which means more inflationary pressure somewhere down the road. In November, fiscal revenue amounted to US$252 billion, but spending was twice as high.

It certainly doesn’t look like the brilliant economic recovery touted by politicians since the pandemic has translated into increased government revenue. Meanwhile, no effort whatsoever has been made to rein in spending, a major cause of inflation.

Alvaro Vargas Llosa is a Senior Fellow at the Independent Institute. His Independent books include Global Crossings, Liberty for Latin America, and The Che Guevara Myth.
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