The View From 1776
Tuesday, November 02, 2010
Keynes Fails The Test
The temporary effect of Obama’s vaunted stimulus spending is over. Business sales are well below the 2008 level, and unemployment remains near 10% (17% if we count those who have simply given up trying to find a job).
New York Times Keynesian flack Paul Krugman, as always, will say that stimulus spending would have worked if we had just had enough deficit spending. That is the same excuse given in every recession since the 1930s to rationalize why deficit spending has never worked to bring business out of a recession. In every case, including Franklin Roosevelt’s New Deal, deficit spending and other Keynesian recommendations have provided only short-term blips at the cost of large boosts to inflation over the long term.
Today’s Wall Street Journal reports the latest evidence of Keynesian failure.
Corporate America is on track to post its healthiest profit margins in more than three years in the current third-quarter earnings season. But some companies are warning that skittish consumers and higher raw-materials prices promise a tougher road next year, damping hopes for a resurgence in hiring.
Michael Lamach, chief executive of Ingersoll-Rand PLC, an Ireland-based manufacturer with most of its business in North America, said in an interview that the U.S. economy, while avoiding a double-dip recession, may remain “lethargic” for a long spell. That would delay a recovery in construction, holding down demand for many of the company’s air-conditioning and refrigeration products at a time when it is paying higher prices for the copper, lead, zinc and aluminum used to make them.
So far, more than 60% of the companies in the Standard & Poor’s 500-stock index have posted earnings for the quarter. About four-fifths of those have logged higher profit and sales than a year earlier, S&P says…
Weakness underlies those comparisons, however. Sales rose, but from a low base last year, when revenue was just beginning to recover from the recession. If S&P’s forecast holds, third-quarter sales will fall more than $170 billion short of where they were in the third quarter of 2008, just before the financial crisis pummeled the economy.
The economy remains sluggish, growing just 2% in the third quarter, up from 1.7% in the second. Economists think that pace is too slow to create enough jobs to roll back unemployment, which was 9.6% in September.
More troubling, the bulk of third-quarter economic growth