Here are two good videos dealing with stimulus spending and Keynesian economics. The first video comes from January 2009 about Pres. Obama’s stimulus plan. Daniel Mitchell clearly specifies how the stimulus will not work, and now drawing close to two years later, we see that the stimulus spending did not help the nation, as proved by our flagging economy and stagnant unemployment rates.

The second video was produced by Daniel Mitchell again a month earlier than the previous video, but this time he is talking specifically about why Keynesian economic theories don’t work.

Albert Einstein is attributed with the following quote that clearly describes this administration and anyone who advocates government spending to “prime the pump” of the economy: “Insanity is doing the same thing over and over again and expecting different results.” Keynesian economics has never worked, but that doesn’t stop governments from trying it again and again. “This time,” the government tells us, “it’s going to work.” Certainly sounds like insanity to me.

I’ve written before about our government’s problem with the economy, as witnessed by their mistaken belief that the government can spend the nation back into productivity. Part of this belief is that there exists some magical multiplier of government spending. The theory goes something like this: when the government spends a dollar on some project, the effect on the economy is greater than the original dollar. It magically multiplied!

As theories go, it’s fine. The problem happens when the ivory-towered Gedankenexperiment is tried in the real world. I’ll simplify this to make it clear: three people, Peter, Paul, and George are the citizens of Madeupistan. To stimulate the economy, George takes $10 from Peter and gives it to Paul. Wealth has not been created, it’s only been transferred since Peter is now $10 poorer and Paul is $10 richer. The net effect on the economy is $0. And this is the best case scenario.

What really happens is far worse. George takes $10 from Peter and gives $4 to Paul. George pockets the other $6 as his handling fee. And as long as George takes money from Peter to give to Paul, both George and Paul are happy with the outcome. Any election or referendum on finances in Madeupistan pass with 66% of the vote as George and Paul are solidly behind the stimulus spending. Peter keeps voting against having his money taken away from him to fund George and Paul, but he’s in the minority, and so he loses. George starts keeping $7 from the money taken from Peter since he has to pay for the increased advertisements needed to demonize the evil greedy rich Peter. Paul doesn’t like getting only $3 when he was getting $4 before and was used to it, so he petitions George to increase the rate of fiscal confiscation from Peter. Eventually Peter gets fed up with having his money seized, so he moves to Freedonia, taking his business and money with him. George then starts eyeing Paul as the new source of stimulus funds.

Policy wonks and university intellectuals love the ideas of John Maynard Keynes, but Keynesian economics just don’t work in the real word. When the government “stimulates” the economy with spending, it does so with money first taken from the people, or with freshly-printed money that is taken from future generations. And in either case, the government keeps some of the money to pay for the process of transferring the money. And the net result isn’t a magical multiplier increasing the wealth and economy of the nation; it’s a unmagical divider doing the opposite. But government will continue to push for Keynesian economics because they get their cut of the money, and they get to say who receives the money and reap the political benefits of their largesse.

If the government wanted to truly stimulate the economy, it would get out of the way by reducing taxes on corporations and people. And this isn’t some wild speculation or untried theory in Madeupistan. It has worked every time it has been tried in the real world.

Let’s suppose that you are an ocean diver with an air hose connecting your diving helmet to the air supply on the boat. And let’s also suppose that the manager on the boat is anxious for the job to finish faster. He’s not diving to help get the job done, but he is certainly willing to tell you how to do the work. And to motivate you, he steps on the air hose while telling you to work faster. Sounds pretty dumb, doesn’t it? How does choking off his life-giving air make the diver work better? The diver needs all the air he can get since cutting down on the air flow starves the diver of the vital oxygen he needs to work at his best.

Likewise, the government is guilty of stepping on the economic air hose every time it raises taxes, especially when companies are the ones being taxed. Corporate taxes depress economic activities just as standing on a diver’s air hose depresses that diver’s ability to work. Taxes are an economic punishment, and people will respond to punishments by doing less of that which is punished. It’s just basic human nature. So a government tax on business activities will result in fewer business activities, and in a time of a recession, do we really want to depress the economy further?

“But the government needs to tax businesses! The government uses that tax money to ‘prime the pump’ of the economy during a recession.” That’s the economic theory of John Maynard Keynes, but Keynesian economics just don’t work. You can see this by taking it to the extreme. If government were to tax businesses at 100% and redirect the results to ‘prime the pump’ of the economy, what would be the result? Sure, the government would pull in taxes the first year, but once businesses realized that the government was serious in taking all their profits, business owners would close their factory and office doors. Why would they work hard for no reward? And if businesses were to shut down, how much of an economy would be left? With a dead economy, the government would get nothing from taxing the vanished businesses, and nothing from a non-working public, so just how successful was “priming the pump?”

Let’s reverse it and see what happens: suppose government dropped the business tax rate to 0%. With no one stepping on their air hose, businesses would be unleashed to work as hard as they wanted to make money, and the economy would roar to life. After all, the economy is not the government handing out confiscated money, but it is businesses and people working for themselves. “But how will the government get the tax revenue it needs to run the country?” Well, if the government doesn’t need to “prime the pump” with confiscated money, its needs are smaller. But because a business is comprised of people, the government will still get taxes from the workers. And interestingly enough, when government has reduced tax rates on businesses and people, the total taxes brought into the treasury go up because the economy runs better with the government off its air hose. It happened with the tax rate drop proposed by President Kennedy and passed after his death. It happened with President Reagan’s cuts in 1983. And it happened again with President Bush in 2003.

Can you point to a time when government “priming the pump” has met with equivalent success? President Roosevelt is often held up as an example of triumphant Keynesian economics, but it’s not the example people think it is. The economy was certainly depressed when FDR entered office, but all the economically stifling actions he pushed for only succeeded in depressing the economy for a full decade. Likewise, the actions of the current administration have done little to stimulate the economy. Unemployment is hovering around 10%, and businesses are wary of hiring as the government continues to meddle, and the economy remains lifeless.

What is the solution for our current doldrums? If the government would step off the economic air hose by greatly lowering tax rates on people and businesses and drastically cutting back on government deficit spending, the economy would explode with activity. And when the economy is roaring along, the lowered tax rates will still result in increased revenue to the government’s coffers, money that the government could use to pay down our country’s debt.

How can I state this with such confidence? Simply because it has worked that way every time it’s been done. Let’s try an economic theory that has a proven track record.