Keynesian Economics: Valid Principles or Re-Election Tactics?

Does the employment of Keynesian economics actually spark the economy, or merely help those in office keep their jobs?

Three primary tools in the Keynesian toolbox, used in significant doses in order to combat economic instability. For decades, they have been the central tenets utilized by various governments in numerous battles to stabilize the economy, up to and including the recent devastation wrought by the post-2008 financial crisis. In this latest iteration and via numerous efforts bookended by TARP and QE2, the United States has invested massive dollars into both the private sector and general economic stimulus, simultaneously attempting to snuff out a forest fire with one hand while lighting a match with the other.

According to the National Bureau of Economic Research, the U.S. emerged from the Great Recession in June, 2009, eighteen months after it started — the longest continuous period of contraction and subnormal growth since the Depression of the 1930′s. And yet, despite over $4 trillion in deficit spending since the start of the financial crisis, numerous Gallup polls show fading public confidence in the prospects for economic improvement in the near term. In fact, as of sixteen months ago, 69% believed the U.S. was either in a depression, still in recession or heading toward one.

Does Keynesian economic theory work? First, a summary of its essential underpinnings...

Does Keynesian economic theory work?

In a free society,what is necessary for restoration of full employment after a recession or depression is a fall in average money wage rates that is more than any fall in the demand for labor.The formula is:

average money wage rates = demand for labor/supply of labor

1) Keynesianism with its budget deficits financed by increased increased government borrowing or higher taxes is an assault on savings and private investment which decreases demand for labor which decreases the supply of labor employed.

2) Deficits financed by increases in the money supply leads to inflation which can increase the demand for labor and supply of labor employed, but when the newly employed workers are employed by the government they tend to be worthless, useless,wasteful,and parasitic to producers.

The destructive effects of budget deficits, confiscatory taxes,government borrowing, and inflation are harmful to the economy as a whole in the long run and causes new and additional problems that are worse than the original problem.

Unfortunately, Romney is completely conventional in his economics. And, these days, conventional means "Keynesian." And, though he and Ryan are much more pro-free-enterprise than Obama, it would be too much to expect that Ryan is any less Keynesian.

The best we could hope for would be for them to appoint Ron Paul as Sec'y. of the Treasury or, even better yet, Chairman of the Fed. He may be a flake on foreign policy, but he believes in a stable, strong dollar and would benefit the country in one of those positions.

Sigh. Won't happen.

"Keynesians are going to win this election either way and to hell with economic liberty. The government is all about control whether it's headed up by the democrats or the GOPe."

Sadly agree with you. The simple math of almost 50% of this nation not paying income taxes is the ultimate Keynesian success.

I'm not a happy camper and starting to think there is no way back. So what if Repubs take the WH, Senate, and House? I no longer believe there will be a strategic means of restoring our Republic simply because most don't want it for various reasons.

"That increased spending (by anybody) can increase aggregate demand is a point that nobody disputes. The question is where the money should be spent once you decide to borrow it."

Do you not see the fallacy in those two sentences? Here, let some simple past owner of 3 small companies explain it to you:

First point: Wrong, while spending "can" increase demand there is no guarantee, depending on your product/service/marketing and size/sector of the enterprise. So many small company owners would dispute your claim. So many fail almost every day. Why has not all the unemployment insurance recipients not made the economy better according to Nancy Pelosi? After all, it pumped billions into the unemployed and what did they do? Why is our economy not better?

Second point: "Where the money should be spent once you decide to borrow it". Small business owners (dry-cleaners, print shops, small restaurants et al at your local strip mall) rarely borrow money other than from their families and friends and mostly use their own capital for their start-ups.

Your premise is flawed and contradicting. Sorry, but once again, I've owned and operated a large film warehouse; a print shop; and a niteclub. None of those companies borrowed money from any institutional lender, and all were built on the capital from private and private investors for the niteclub.

In the case of the print shop, I helped build a divising wall between the customer service area and the productions area, painted the walls, attached the floorboards, bought and set up the printing equipment, bought and assembled the shelves for the paper, and much more. It was an empty space before I and my relatives made it a business. I won't bother with the warehouse or niteclub - too much to include.

Maybe I misunderstand your point, but my point is clear as day. Other than the warehouse that I took over and made profitable, I built my other companies from ground up! I retired at 47 due to 11 years hard work in Aviation Navy and hard work after I got out. Bambi can kiss my ever-loving ass when he says, "you didn't do it".

The depression of 1920 was over in a year because the government kept their nose out of it and let it run it's course wiping out the irresponsible! In 1929 depression FDR stuck his nose in it and stretched it out for 12 years. Obama is doing the same thing now.

Hi Dale:

Thought about you on Friday. Haven't bumped into you for a while, and hoped you were doing okay. Glad to hear from you.

I agree with your take on things. Roosevelt's strategy has been pretty well debunked by everyone except Obama and the Left. To them he's their hero. I guess we have to understand that they didn't study the mundane things that make this nation work. They only studied at the feet of people who focused on this nation's evil sins, and massive they were/are don't you know. /s

I'm not as informed about Hoover. What's your take on him. I've wondered if he was sort of a Bush figure (or vice versa). Do you see him that way, or am I way off base with that?

Take care.

Sorry, you'll have to argue with every economist on earth, including the most conservative at the Chicago School and the Austrians. Spending -- by any spender -- increases economic activity. NO ONE, NO ONE disputes that.

The Austrian viewpoint -- and the correct one -- is that since no one person or group of people is smart enough to figure out how to optimally spend money, we must all do it, through trillions of individual transactions each and every day. Markets are effectively a computer program moving timesteps in the direction of steepest descent in a phase space with beyond astronomical numbers of dimensions. When agents try to move them according to some "plan" the result is invariably less than optimal. That doesn't mean spending doesn't work; it means that spending by government is far less efficient than spending by millions of individual free actors.

As a small business owner myself, I appreciate your anecdotes, but they aren't germane to the economic theory or practice of aggregate demand. You have seized on "borrowing" as being existential to my argument, but it is merely circumstantial. In the current stimulus, and in Keynesian economics in general the spending is (mostly) being done with borrowed money. But spending from whatever source increases economic activity. That doesn't mean that taking $5 trillion from future taxpayers is the best way to do that; in fact, it's just about the worst. The best way to do it is by having the current and future taxpayers save and invest, putting their capital at risk to advance new startups, new ideas, and new energy. That's were the crux of the debate is, and why Keynes is so terribly, tragically wrong.

Very good. This is actually a problem with the current mantra on the Right that cutting taxes will provide a stimulus. It won't. There a lot of reasons, but the biggest is that tax cuts financed by deficit spending are simply allowing consumers to overdraw their unseen credit to buy cheap labor in China and other cut-rate labor markets. Those tax cuts will help the global economy, but they won't help ours. Only real structural reform that cuts taxes, lowers the cost of capital formation, and removes the perverse incentives in our economy is going to help; simply bribing consumers with their kids and grandkids money to buy stuff will not.

"...Keynesian economics in general the spending is (mostly) being done with borrowed money. But spending from whatever source increases economic activity."

Really? So then you also believe that the more people on unemployment insurance can generate economic growth as Pelosi has stated? I don't believe you're thinking clearly, because you go on to say...

"That doesn't mean that taking $5 trillion from future taxpayers is the best way to do that; in fact, it's just about the worst. The best way to do it is by having the current and future taxpayers save and invest, putting their capital at risk to advance new startups, new ideas, and new energy. That's were the crux of the debate is, and why Keynes is so terribly, tragically wrong."

With due respect, you're all over the macro-economical map. Keynesian theory is just wrong and always has been. Supply-side economics had made us a rich nation until it was curtailed by socialists. Restrictions on growth through whatever means (taxes, regulations, Executive Orders, uncontrolled agencies like the EPA, DOI, HHS, et al, Fedgov interference in companies like GM, I could go on) will always result in the negative.

You should probably rethink your statement to choose a side.

I give up. You clearly don't understand ANYTHING about economics, and have no interest in learning.

For other people who might be reading and are interested in actually learning something: spending increases economic activity. Keynes and ALL OTHER economists agree on this point. That isn't the question. The question is WHAT kind of spending BEST increases economic activity. Government spending actually is the WORST way to increase economic activity. That's where Keynes is wrong.

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