The first fundamental failure of Keynesian economics occurred forty years ago during the Vietnam War when the economy was overheating but the political system failed to take the corrective steps that would restrain price inflation—that is, raise taxes and reduce federal spending. The decade of economic stagnation that followed became a central factor in discrediting both liberalism and the Democratic Party.
We are now witnessing a second great failure of the doctrine John Maynard Keynes devised for managing a healthy economy. This time, Washington faces the opposite problem—a starkly underperforming economy in which 10 percent of the workforce are without jobs and income. Yet the President and Democratic Congress, spooked by the swollen federal deficits, are unwilling to do what Keynes prescribed in these circumstances—pump up federal spending enormously and run even larger budget deficits in order to force-feed a stronger recovery.
The results of this political decision will be tragic for millions of struggling families, but also potentially devastating for the Democratic party. Democrats are implicitly choosing to do nothing more to rescue the country from the deepening dislocations and lost output. Making mistakes can be forgiven, but not giving up.
