Keynes's Wrong-Turn HypothesisBy Thomas E. BrewtonAs Keynes observed, people often unknowingly are the prisoners of  erroneous doctrine propounded by long dead theoreticians, in this  case doctrine of Keynes himself.I have noted before that Wall Street Journal news reporters often  display pervasive, sometimes subtle, liberal-progressive-socialist  biases.  Unlike the Journal's editorial board writers, among other  things, they still parrot the nonsense popularized by economist John  Maynard Keynes during the 1930s Depression.Since Keynesian economics is the reigning school of thought in  socialistic academia, it's no surprise that Keynesian nostrums are  repeated, without evaluation, by today's reporters.One example is in the Journal article titled The Doomsayers Who Got  It Right.http://online.wsj.com/article/SB123086035502948067.htmlThe Journal reporter writes:"Those who saw the crisis coming, on the other hand, fret that U.S.  government spending on bailouts and stimulus plans that preserve  failed business models could increase the likelihood of a worse  calamity later."They foresee a long season in which consumers cut their spending,  and instead sharply increase the savings rate. That would be healthy  for savings-anemic U.S. households, which have spent beyond their  means for years, but deeply problematic for a country where consumers  drive 70% of all economic activity."The matter of concern is the statement that increased personal  savings would be "deeply problematic for a country where consumers  drive 70% of all economic activity."Keynes asserted that the root cause of our Depression was excess  savings.  His thesis was that savings take money out of circulation,  thereby reducing consumption and putting ever greater downward  pressure on business activity and job creation.  The appropriate  remedy, in Keynesian doctrine, is endlessly expanded government  deficit spending.This same thesis, needless to say, is widely advocated by Democrat/ Socialist and liberal Republican politicians, by Wall Street  operatives, and by liberal-progressive-socialist economists.  News  reporters and commentators, in the main, go along for the ride.So, what is wrong with the Journal reporter's statement?First, is assumes that money placed by individuals in savings  accounts will no longer be available in the flow of economic  activity, that it will, in effect, be buried in the back yard or  under a mattress.What really happens is that savings, through one channel or another,  end up as increased deposit balances on lenders' balance sheets.   Several beneficial effects arise from this.One is that banks and other financial intermediaries have increased  and more stable lendable funds.  Consumers with higher savings are  more creditworthy and will find it easier to obtain bank loans.  Ask  yourself why former investment bank titans Goldman Sachs and Morgan  Stanley opted to become commercial bank holding companies and compete  to get stable bank deposits.Government stimulus programs, in contrast, produce temporary and  therefore unreliable bursts of increased bank deposits, leaving  lenders wary of significant increases in lending activity.Another benefit is that, with balance sheets strengthened by stable  savings deposits, financial institutions are less dependent upon  Federal largesse and less likely to become ensnared in European-style  regulatory management of lending and investment policy.  Innovative  new businesses and existing small businesses, which create  disproportionately more new jobs, will gain additional financial  support.In contrast, as the price of bailout funds government is nudging  banks into lending to keep Detroit's Big Three automakers and the UAW  union afloat, and to compel higher investments in the least  profitable of auto products: hybrid or battery-driven "green" cars.The second major problem with the erroneous Keynesian doctrine  expressed in the Journal news story is that consumption does not in  fact drive the economy.  The wages and profits, from which come  consumer spending and saving, cannot exist without the long chain of  business expenditures for investment in new equipment, new process,  and for payments to materials suppliers and workers.Consumption expenditures are just one of the by-products of business  expenditures.  Business expenditures are the real drivers of the  economy.Business expenditures for new investment and for production of basic,  intermediate, and consumer goods are as large as, generally larger  than, consumer expenditures.The exception is a period like our recent one, in which government  deficit spending leads to excessive fiat money creation by the Fed.  That impels an unsupportable increase in borrowing, as the value of  the dollar declines.  Consumer borrowing in this circumstance, as we  have witnessed over the last 15 to 20 years, leads to negative  savings.  Consumer spending was increasingly floated on credit-card  and home-equity-loan borrowing.  Spending more than we produce does  not make a healthy economy.  It just booms imports.Government stimulus programs may be welcomed by businesses and  consumers in the vain hope that they will provide relief from a  recession.  But we know from unvarying experience, beginning here  with the Roosevelt New Deal, that government stimulus spending never  ends a recession.  In fact such spending tends to prolong and to  worsen a recession.One reason for the failure of stimulus programs is that consumers,  already fearful of losing jobs, tend to use stimulus payments to  reduce debt and to increase savings.  Very little of it goes to added  consumption goods spending.  President Bush's stimulus program early  in 2008 was a flop.  President-elect Obama's will end the same way.Another and more fundamental reason is that business does not like  uncertainty.  When the Federal government begins tinkering with the  economy, as it did in the Depression and as it is doing now, it  creates new layers of bureaucracy to administer new and more  restrictive business regulation.  Government typically increases  business taxes at the same time, while mandating costly new business  methods (think of the looming presence of president-elect Obama's  Carol Browner and other other Al Gore environmentalists).In such times of high costs, low profits, and prospective government  experimentation and regimentation, prudent businessmen hesitate to  increase production or to make new production investments.  And  without production increases there will be no increased payments to  suppliers and workers and therefore no wage increases or added jobs.Government stimulus spending financed with more debt adds to  inflationary pressures.  This is what occurred in the 1970s  stagflation.  During a high inflation period, which almost certainly  will hit us within the next couple of years, people's nominal incomes  increase, but their costs of living rise even faster.  Worse, as  their nominal income rises, they are pushed up into higher tax brackets.The final injury of the fiction that consumer spending drives the  economy is that the government pays for its ineffective, indeed  counterproductive, stimulus programs by stealing consumers' lifetime  savings.  By the mid-1980s, when the 1970s stagflation was finally  halted by Paul Volcker, the real purchasing power of consumers'  lifetime savings was less than half what it had been before President  Johnson's Great Society welfare-state entitlements set in motion our  destructive 1970s inflation.Thomas E. Brewton is a staff writer for the New Media Alliance, Inc.  The New Media Alliance is a non-profit (501c3) national coalition of  writers, journalists and grass-roots media outlets.