Keynesian Economics is Not the Answer

John Maynard Keynes was a British economist who is most famous proposing what is commonly called today deficit spending. That’s only a portion of his theory but it captures the gist of it. He particularly thought government deficit spending was necessary in times of economic turmoil in order to stabilize the economy. His ideas were first put into practice in a significant way during the Great Depression – although some people argue that FDR didn’t do enough to stimulate the economy (i.e., he should have pushed for more spending). There is some merit to this idea. The Great Depression really did not end until WWII and all the government money being spent on building war machines, training and supporting soldiers, etc. On the surface it looks like massive government spending was what fixed the economy. That may be.

However, it also started an era (that has not ended since – there were short periods of time when Keynesian economics was not popular with governments but many of the underlying principles were never rejected) of big government and governmental intrusion into the “normal” workings of capitalism and the free market. As the markets thrived, people spent more money, acquiring more possessions. Governments and businesses followed suit. The U.S. enjoyed relative prosperity between the years of 1945 and 2000 (I could even argue it to 2007). There were some rough stretches in the late 70s and in the 80s but generally the economy was quite good. The Korean and Vietnam conflicts did not significantly interrupt the economy. Neither has any war since (although the latest Iraq War certainly did not help the budget).

The problem with Keynesian economics is that no one reverses the intervention. Governments spend more to stimulate the economy then never (or very rarely) cut back. The other problem is that individuals also deficit spend in the acquisition of more goods. Wants become needs and the deleterious cycle of borrowing and spending then borrowing to repay spending takes on a life of its own. In short, both governments and citizens overspend, which is an unsustainable path. I believe much of our current economic crisis stems from such wasteful deficit spending on an individual and governmental level. I think that Keynesian economic policies were one of the instigators of the current economic turmoil. It just took many years for it to develop again.

That’s why I don’t believe that having the government jump in to stimulate the economy is the right path, especially now that the most conservative estimate of the cost of the economic stimulus is $1.2 trillion (other estimates put the cost at around $2 trillion)! Sure, it will help the economy in the short term. It will probably even help the economy for much of our lifetimes. However, I think it “fixes” the economy at the expense of our children’s security. At some point the government cannot jump in and fix the economy any more because it is the economy. Just as communism was shown to be economically unsustainable, Keynesian economics is also unsustainable (unless it is applied topically then removed when the crisis is over, to use a bit of medical terminology; even then I don’t think it is the best approach). Keynesian economics is not socialism but it does have socialist inspiration. I’m not using an association fallacy (i.e., guilt by association) to equate Keynesian economics with communism or socialism (i.e., Keynesian economics = communism = bad; this is not true) – that’s not my point. I’m merely pointing out that at least the communist variation of socialism was shown to be unsustainable. Governments that strictly follow Keynesian economics could end up in an unsustainable state (as I said before, there would be no more room in which to maneuver).

Now, I don’t think a completely hands-off approach is necessarily the best way to help the economy but we should start with less intervention, less government, and less deficit spending. If we as people and if the government all lived within our means, that would be a major step towards fixing the economic problems of our nation and of our world.

2 thoughts on “Keynesian Economics is Not the Answer”

  1. The problem isn’t Keynes, per se, the problem, as you pointed out is that during times of economic upswing, the deficit must be paid off and spending reduced. We’ve come into this recession with a large inheritance of debt from the Bush administration when economic times were supposed to be all right. Now government is just heaping insult on the injury.

  2. I understand the whole concept that during good times pay back the deficit. The problem with that is that government has been expanded during the recession and spending has increased. The “temporary” government is never temporary. That means we have to increase taxes to take up the new formed government. Even if we have a surplus, our “bailout” (in a broad term) money far exceeds our taxes in the “good times”

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