Dead-End: A Cyclical Policy for a Secular Problem

Some may be surprised to learn that Keynesian stimulus was not intended to pay for massive tax cuts and military blunders

"Reagan proved that deficits don't matter" - Dick Cheney
U.S. Federal Debt Adjusted for Inflation:

In 1980 the term "Republican Conservative" became inverted to mean someone who spends the government into oblivion. The debt tripled from 1980 to 1990. "Tax and spend" Democrats were onboard from the start.

Macro Econ 101:

The purpose of Keynesian fiscal stimulus is to stabilize the economy during recessions to alleviate the impact of poverty and mitigate business failure. Fiscal deficits are run during recession and fiscal surpluses are run during expansions to keep the debt stable. Which, as we see above worked just fine for forty years straight. Only revisionist historians who've never experienced a Great Depression first-hand would question the sanity of this stabilization policy (when properly implemented).

Enter the Laffer Curve

Economist Arthur Laffer postulated that if tax rates are reduced, government revenues will actually rise instead of fall, because people will be incentivized to work more. Of course, in reality, this method of "increasing" tax revenue may well work at extremely high rates of taxation, approaching 100%, however, it's mathematically impossible at lower rates of taxation. For example, at a 20% tax rate, each dollar of reduced taxation would have to produce a 5:1 (500%) increase in economic output in order to offset the lost tax revenue. 

Still, as we know, that didn't stop Supply Side Neocons from basing their entire multi-decade borrowing spree on this specious disaster with the end result being highly visible in the first chart above.

What Went Wrong?

Getting past the blatantly obvious aspects of this con job i.e. that it did the exact opposite of what was intended, the real question on the table was whether or not Keynesian cyclical stabilization could offset the secular long-term impacts of Globalization, and the answer of course is no. The 1970s stagflation was the wake up call that the consumption-oriented lifestyle was ending, and that it was by no means sustainable nor scalable across the global population. The resulting Ponzinomic policy response was merely intended to paper over the economic impacts that Globalization was having on the U.S. (and developed world) economy. The writing was on the wall, and hence it was completely ignored and papered over by debt.

Only by turning the entire Third World into a prison sweatshop and then borrowing from the factory slaves - now at 0% - could the consumption orgy continue.