Keynesian Economics

Pro, thanks for taking the debate. I look forward to reading your viewpoint. Imagine John Q Taxpayer. Last year he made $46,000, spent $62,000, and his overall debt is $154,760. For 26 of the last 30 years he has spent more than he made. From this, we can conclude that John's economic outlook is not good. John seeks financial advice. His financial guru, Mr. Keynes, suggests, "John, what you need to do is increase spending." Should John increase spending or should John fire Mr. Keynes? In this situation would you ever conclude that the solution involves a spending increase? Mr. Keynes plan, "prosperity through deficit spending" would, for John, be a bafflingly self-destructive solution. That logic, when applied to personal health, would indicate that the solution to your lung problem would be to smoke two packs per day instead of one. In reality, John's problem is the U.S. taxpayer's problem with a few substitutions: $46k is $4.6 trillion, $62k is $6.2 trillion, $154,760 is $15.4 trillion. [1] When this idea is scaled up to the level of the U.S. economy it will work – correct? Keynesian economic theory was put forth by John Keynes in 1936.The most important part of his theory deals with the role of government in the financial sector during an economic downturn. Keynes argued that it was the government's role to "prime the pump" during an economic downturn. Government needed to increase spending to replace the money that was not in the economy (in theory). The idea is, when the economy is bad, people stop spending and start saving. When the people stop spending and start saving, demand goes down and the economy gets worse. Keynes advocated consumption, and more consumption. Keynes hated saving. Another part of this theory is the redistribution of wealth. Keynes believed that the best use of government overspending is to give it to the poor. He believed that the poor will not save any of their newly gained wealth. They will spend it thus helping the economy. [2] One last key feature of Keynes theory is multipliers. In the theory as money is spent, this money gets "multiplied" as it goes from the people to business. [3] For the theory to work the multiplier must be greater than one. Perhaps Nancy Pelosi explained multipliers best when she stated that for every $1 the government spends on food stamps, we get $1.79 back. [4] Food stamps as an investment strategy? Inexplicably, there are some problems with Keynes theory. A big problem is: where does this stimulus money come from? There are three possibilities: 1) increase tax revenue, 2) print more money or 3) borrowing money. Option 1), increasing taxes will only take money from one part of the economy and put it in another. In reality, savings in a bank is simply reinvested in the economy by the bank. The belief that money has left the economy is simply wrong. In any case, even Keynes did not advocate this action. Keynes supported tax refunds (money directly to the people) for stimulus. Option one is not Keynesian. Option 2), printing more money may work for a short time. However, the consequences of rampant money printing have been well established. Overuse of this method can lead to hyperinflation. Ask the Argentines, Brazilians, or Germans. Additionally, during the 1970's stagflation occurred because government spending crowded out private investment and inflation resulted from excessive money printing. [5] Option two leads to failure. That leaves Option 3), deficit spending, the preferred Keynesian option. There are problems with option 3). You need to believe that the government has the knowledge and capability to improve the market. In June 2011 President Obama admitted that, "Shovel-ready was not as shovel-ready as expected." This was in response to a question about how the permit process often caused projects to be abandoned. [6] So much for knowledge and capability. Additionally for option 3), you must believe that government is acting in the best interest and will not squander money for political gain. That is naï¿½ve. The U.S. government has a history of spending for political gain. For example the government heavily subsidizes Ethanol production even though it is a negative energy fuel. Al Gore admits ethanol was a politically motivated mistake. [7] More recently, the government wasted $500 million on the Solyndra debacle. [8] Governments do not spend money in the best interest of all; governments spend money in the best interests of whomever is in power. Finally for option 3), what happens when we have to pay back the loans? For a Keynesian this is no problem. Keynes is remembered for stating that "in the long run we are all dead." [9] Robert Skidelsky, noted that Keynes' had a "lifelong bias against long-run thinking" and "He was not prepared to risk too much of the present for the sake of a better future." To be a Keynesian you must not believe, or simply not care, that the money has to be repaid. [10] Ask Greece if that works. Does Keynes' theory work in practice? A good example is Japan. During their "bubbles" in the 1990's, Japan tried 10 separate stimulus packages that didn't create much economic growth or significantly lower unemployment. [11] Their debt went from 71% of GDP in 1990 to 228% of GDP in 2011. [12&13]Bush started and Obama boosted stimulus spending to a new high. During Obama's Presidency, unemployment has gone from 7.2% to 9.2% and around 13 million more people have been added to food stamps. [14] When Obama took office the debt was 10.6 trillion when 2011 is done it will be 15.4 trillion. [1] This, after 30 years of deficit spending. For Keynesian theory to work you must believe: 1) multipliers increase money, 2) government acts in the best interest, 3) no repayment of loans and 4) it will be different this time. [1] http://www.usgovernmentspending.com... [2] http://www.wisegeek.com... [3] http://www.econ.washington.edu... [4] http://politicalticker.blogs.cnn.com... [5] http://www.investopedia.com... [6] http://nation.foxnews.com... [7] http://www.huffingtonpost.com... [8] http://abcnews.go.com... [9] http://blog.cleveland.com... [10] http://www.tkc.com... [11] http://brianekoenig.com... [12] http://www.washingtonpost.com... [13] http://www.economicshelp.org... [14] http://michellemalkin.com...