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Keynesian

I am interested to see if the Keynesian economic measures of the past couple of years will actually have worked. In short, Keynes theorized that a government could spend its way out of a recession. This is controversial, and proponents of the more conservative economic schools believe it is patently false, and maybe even evil.

Certainly the stimulus act didn't work as hoped - the economy is not booming, and unemployment remains very high. On the other hand, the economy has grown, just not as fast as hoped. Economists on the left and right are both arguing that each other's policies don't work. (The conservative view being that any regulation of economic markets, AT ALL, will slow the economy, and so government ought to have in essence, no economic policy at all, as well as the lowest possible taxes.)

It seems to me that the right's laissez faire canards are ill-conceived and largely created the collapse in the first place. But that doesn't necessarily mean that Keynes was right, and increased spending along with increased taxes are the cure. Given that we went from an economy that was flush and a budget surplus (Clinton) - to a Republican-controlled house, Senate and White House - and then right back to a Democrat controlled house, Senate and White House, there should be some fairly persuasive data when all is said and done.

So yeah, this should be interesting.

Comments

( 2 comments — Leave a comment )
nephandi
Aug. 10th, 2010 02:16 am (UTC)
Economics! My worst subject.

I heard there was broad consensus among economists that unemployment benefits in particular should be funded during the recession, and it was startling a few weeks ago when such funding looked like it might be stalled in Congress.

One of the effects of the recession is that productivity is WAY up. I wonder if unemployment will remain at 'European levels' for a long time, and if it does, will we see in America the development of a first world welfare state?
trekhead
Aug. 10th, 2010 05:00 am (UTC)
Keynesian economics boils down to a very simple principle:
Your total economy is the sum of your business spending, government spending, and consumer spending, plus the value of your exports, less the value of your imports.
E = B + G + C + E - I
In a downward spiral (a recession), your consumers spend less, because they are having trouble finding or keeping jobs and they are worried about saving money. Your businesses spend less because they don't want to expand when demand isn't present. That leaves you three ways to change your economy:
* Raise export vaues
* Raise government spending
* Lower imports
Changing imports and exports is tricky because this means you are running your economy at the expense of other countries, which usually drives them to protective tariffs.
That leaves just the government to spend money to make up the shortfall in the economy. The government must spend more money than it takes out of the consumers' and businesses' hands (in taxes) in order to drive the economy up. By employing people, the government puts spending money into the hands of consumers, who then spend that money on houses, food, cars, and clothes. By ordering tanks, construction equipment, power plants, and civic projects, the government puts money into the hands of businesses, which must employ new people to meet this demand.
This is the simple basis of Keynesian economics: To get out of a recessionary downward spiral, you MUST find a way to bolster spending and make the economy move upward again, and if you cannot get consumers and businesses to do so, then the government MUST be the one to do it.
The conservative/libertarian alternative viewpoint is that you can create business and consumer spending by removing government regulations. This is true -- but those regulations exist because they prevent the types of businesses that you DON'T WANT. If you remove the regulations against, say, selling faulty windshields but advertising them as shatter-resistant glass, then you will get more business -- in the form of companies selling dangerous windshields to consumers at cut rates. The question then becomes, which regulations can you safely scale back (because they are blatant favoritism, cronyism, protectionism, or stupidity), and which ones are necessary for the safety of the populace? The folks currently running the show in the Republican party (and the so-called "blue dog" Democrats) will tell you that you should get rid of all the taxes on business, in order to encourage investment and business spending. The libertarian fringe will tell you that you should get rid of all government regulation of the market, period, because "the market will regulate itself." (Since caveat emptor will surely take effect after a faulty or dangerous product has already killed hundreds of people . . .)
If Keynes is right, you want increased spending with no change in taxes -- you must run a deficit to push the economy up.
The real problem, of course, is that markets are not infinite, and expansion is not eternal. But nobody really wants to confront that reality.
( 2 comments — Leave a comment )

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