Monday, November 12, 2012

A Keynesian Primer

I guess if you are going to spend at least the next four years living under a government that wholeheartedly believes in Keynesian economics, it might be useful to understand what that is and what the counter arguments are.

Keynesian economics, the economic philosophy of John Maynard Keynes, an early twentieth century economist, held that the government should work to stabilize the economy during times of recession and depression by increasing economic activity through government spending.  (Disclaimer: I'm not an economist.  There is a lot more to any economic system than can be communicated in one or two sentences but I think it is probably fair to say that this is what it boils down to.)

This is basically the model that the United States and most western democracies have operated under since World War I but there are some issues that you might wish to know about.

The first concerns what the appropriate action of government should be once the recession or depression is over. I have not read Keynes' original works but the reading I have done suggests that the interventions by the government should be limited to direct intervention during the time of slowdown, projects such as some of those implemented by President Roosevelt during the thirties.  Over the past eighty years it seems as though much of the intervention has taken the form of new programs which persist and require substantially higher levels of spending after the "need" for them has long passed.

The second is a basic flaw in the whole Keynesian model, which is the failure to take into account the loss of productivity in the private sector that government spending causes.  When government spends money it is no longer available to private enterprise, plus government borrowing increases the cost of borrowing, reducing private access to capital even further.  The Congressional Budget Office, which assumes Keynesian models in all their calculations, uses a model which assumes that government spending increases jobs, regardless of what actually happens.

Turns out that the only way you can demonstrate that Keynesian economics works is to assume that it works.  The models used by the CBO and others assume a particular model (government spending creates growth) and then claim success based on how bad things would have been using the same model (unemployment would have been much higher had the government not spent the money).

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