A Keynesian Precursor

I’ve been mulling a long post on why I think Keynesianism — which is what both Republicans and Democrats are pushing these days — is garbage. But there’s one aspect of it that’s reared its ugly head lately that needs to be stomped on ASAP.

One of the things the Keynesians used to think was that it was impossible to have both high inflation and high unemployment. In fact, they claimed there was a mathematical relationship between the two. From the 1960′s through then 1970′s, our government deliberately inflated its currency because this supposedly stimulated economic growth. The theory was that by destroying people’s savings and investments, you forced them to spend money (I’m explaining in much more invective terms than they would).

It turned out that they had things backward — again, social scientists unable to distinguish correlation from causation. High economic growth can cause inflation, which is why the fed tightens the money supply when things are going well. And deflating the currency can make an economic crisis worse — as it did during the Great Depression. But inflating the currency has, at best, a minor effect on the economy.

The thing is, this is not empty-headed theory I’m talking about there. The supposed inflation-employment informed our inflationary policies for decades before crashing into reality in the late 1970′s, when he both high inflation and high unemployment. The inflation enthusiasts still have not explained that; they prefer to ignore it.

Cato has, the last week, destroyed this theory in two posts that clearly show the inflation-unemployment relation does not exist. But Keynsianism — or consumerism — is increasingly becoming a religion. So expect this hard data to be ignored.

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