White House spokesman Jay Carney was preaching the religion of Keynesian economics. It is a method by which government inflates demand by putting money into peoples’ pockets to spend on products, thus, stimulating productive segments of the economy that would have otherwise remained idle, to produce wealth. They would argue that the poor are more likely to spend that money rather than keeping it from circulation by saving it. This behavior, Keynesians argue, guarantees even more generation of wealth. Eric Cantor comments that the theory is: “government can be counted on to spend more wisely than the people.”
The problem is demand does not generate wealth, capital, both human and material, does. Wealth is generated by the accumulation of income producing assets or what economists call capital formation. Keynesian economics fails becuase government misallocates resourses, and because government can’t create wealth. It can only move it around.
Paying someone not to work does not grow the economy. When someone spends all of their money instead of saving or investing it, they will never be wealthy. They become dependent on the system.
Keynesian economics fails because of an effect called “Crowding Out.” Simply put, for every dollar of government spending, private investment must be reduced by the same amount. Since the government does not have a surplus of money to spend, it must sell treasury bills to finance this spending. Thus, personal and corporate savings are used to buy these T-bills, and these funds are no longer available for private spending and private investment. Thus any increase in government spending is exactly offset by a reduction in private investment and private spending.
When Keynesian policy fails to stimulate, the chorus from the left will be that the government didn’t do enough. Didn’t spend enough. The government will rush out an even larger stimulus package, but this time our Asian benefactors might not be so quick to finance it. In fact, they may decide it’s time to cash in their chips. If that happens, hyperinflation will ensue decimating what is left of the consumer’s purchasing power.
I am not a Keynesian by any means, but since 30% of the treasuries are foreign owned, there should be at least some stimulative effect. I.e., if the govt. deficit spends 100million, 70million of that is sucked out of the economy by U.S. individuals and institutions buying treasuries, but 30million flows in from abroad. Again, I’m not advocating it. It is terribly inefficient, and at best may have some very short term effects. There will have longer term negative effects that outweigh short term benefits anyway.