Sep 25, 2009

The Waterloo of Keynesianism (Military and Domestic)

by Liberty and Power

Note: In part, this post is an answer to a query by Mark Hatlie.

This following is an excerpt of a post at the blog of Historians Against the War. Comments are welcome:

While it is perilous for any historian to predict the future, we may well be headed for the Waterloo of Keynesianism (both military and domestic) and that is a good thing.

Crudely put, Keynesianism (so named for the British economist John Maynard Keynes) is the theory that government’s can speed long-term recovery by running high deficits so as to stimulate aggregate demand or investment. It is the entire basis of Obama’s stimulus plan. To some extent, Keynesian ideas were the basis of Bush’s massive bailout and big spending policies, most especially his now forgotten “stimulus checks.”

The popularity of the Keynesian theory is something a puzzle (at least to me). Few ideas more defy ordinary common sense. Taken in today’s context, it seems akin to telling an individual who has recklessly run up a hundred thousand dollar credit card debt to spend even more on fixing a driveway or garage (infrastructure). For some reason, such advice (which would be considered utter lunacy when applied to individuals) is widely accepted as the best method of economic recovery when taken by governments.

Read the rest here.

More Comments:

BillWoolsey - 2/26/2009

Suppose your spouse borrowed money to fund her business. She was making decent money paying part of the family expenses. Her business fails and she is bankrupt. The income from the business is gone. The family cuts expenditure, but you also go into debt. You will be able to pay these debts out of your future income. But, more importantly, when your spouse finds a new job, family income will rise again.

This doesn't have much to do with Keynesian economics, but it seems clear to me how more debt can be desirable in the aftermath of bankrupcty.

In Keynesian economics, debt financed government spending is supposed to work by reducing the demand for money. Given the money supply, this raises spending. With the price level above equilibrium, the equilibirum price level rises towards the current price level. I think it is plausible enough.

But I am not sure where you get the idea that Keynesian economics assumes that the "problem" was too much debt and that more debt is supposed to solve the problem.

csense - 2/24/2009

I have not forgotten my stim checks . . . they are still sitting in my bank account. Thanks for the refund, Uncle Sam!