This has been a phenomenal year for the economy. There have been major, fundamental changes that will affect our lives for many years to come. I don’t see these changes as a good thing for the short or long term.

These changes are generational in that they don’t occur often and they will radically impact the economy and our well-being for decades. I thought of doing a decade review because it explains so much of why we are where we are today. But so much happened this year, that I’m glad the year is over.

1. The Triumph of Keynesian Economics.

Liberals, Progressives, and Democrats were eagerly waiting for an economic crash so they could clip capitalism’s wings. They got their wish.

When the crash happened, most people, including most Conservatives, scratched their heads and said, “Yup, it’s capitalism. Bad, but necessary system. Got to control it even more.” They ran to the Keynesian-New Deal play book.

Very few economists stood against this proposition and when the Democrats acted, it was right out of the Keynesian playbook: keep interest rates low, flood the economy with credit, pass spending bills to implement fiscal stimulus, and adopt more stringent rules to regulate financial institutions.

This is a result of 70 years of Keynesian economics education in America and the rest of the world. Paul Samuelson, who just died, was the father of the Neo-Keynesian econometrics movement in academia, and he and his fellow Keynesians are mostly responsible for this.

My fellow free market Austrian theory economists lost their seat at the policy table, and in fact have been banished to the back room. We need to do something about this. Our well being rides on it.

2. The Failure of Keynesian Economics.

The only problem with Keynesian theory and its policy applications is that it doesn’t work.

I am not unaware that many commentators and economists are pointing to recent “Green Shoots” as proof that Keynesian policies work, but it doesn’t. By their own admission, at least according to Paul Krugman and many other Keynesians, the fiscal stimulus has been insufficient to bring about a lasting recovery. Krugman worries about a second collapse when the stimulus runs out. He’s right.

What we are seeing in the economy that is labeled “recovery” comes from two things:

a. The temporary effect of federal spending from the $787 billion American Recovery and Reinvestment Act of 2009; and

b. Normal recovery behavior that occurs after every crash and that is unrelated to fiscal stimulus.

Much to the chagrin of our Economic Czars there are nagging problems of deep concern. Unemployment. Falling asset values, especially in the real estate market. Lack of bank liquidity and bank failures. Lack of credit. Falling consumer consumption and rising savings. “But, it’s supposed to work, dammit!” Keynesian theory was supposed to open the liquidity trap, create jobs, and stoke the economy by taking my money and give it to someone else to spend. It didn’t work in Japan and it isn’t working here.

The stimulus won’t last.

3. New Deal v. 2.0.

The Washington–Wall Street Economics Complex is in full swing.

Too Big To Fail has been the motto of this Administration (as well as the last one). As always there are many political strings tied to economic policy coming out of Washington. While TBTF is not this year’s story, the bankruptcy and bailout of GM and Chrysler in 2009 is. It is a bailout of the UAW and other auto industry unions and nothing more.

The bailout of the banks and major financial institutions is just the same. Yes, Citi didn’t fail and AIG was taken over, but this temporary relief will just stall a recovery. Bankrupt institutions must fail; otherwise their balance sheets will remain fouled and valuable capital will be lost, mired in unprofitable loans.

The Administration and Congress are now putting forward new legislation to further regulate businesses and financial companies. These new laws are not re-regulations, but are increased regulations that will give the federal government even more control over the economy. By asserting itself further into commerce in order to wield greater power, the center of power has moved farther from the money and commercial centers like NYC, Chicago, and L.A. into Washington, D.C.

These policies are political expediencies and work to undermine the best interests of the American people because they reward the very companies that ought to fail. It will delay economic recovery by propping up essentially bankrupt companies who are now relegated to begging Washington for more money.

It will be a boon for lawyers. … Continue reading 2009: Why It Will Affect Everyone’s Future For Generations To Come