The Folly Of USGOV Stimulus packages and Keynesian Economic Theory: (On the Bailout, Part 31)

Stimuluses (Stimuli?)  don’t work from an economics PoV.

As blogged here, it may sounds good…

An economist named John Maynard Keynes argued that the economy could be boosted if the government borrowed money and spent it. According to this Keynesian approach, this new spending would put money in people’s pockets, and the recipients of the funds would then spend the money. This would, according to the theory, “prime the pump” as the money began circulating through the economy. The Keynesians also said that some tax cuts — particularly lump-sum rebates — could have the same impact since the purpose is to have the government borrow and somehow put the money in the hands of people who will spend it.

…but it has a flaw:

It overlooks the fact that, in the real world, government can’t inject money into the economy without first taking money out of the economy. Put more bluntly, Keynesianism only looks at one-half of the equation. It conveniently ignores the fact that any money that the government puts in the economy’s right pocket is money that is first removed from the economy’s left pocket. As such, there is no increase in what Keynesians refer to as aggregate demand. The bottom line is that Keynesianism doesn’t boost national income, it merely redistributes it.

Economics is hard to understand and is poorly taught in the US. The Macro-Economist oversell it predictive and proscriptive qualities. It should be no surprise therefore that junk economics is consider public policy “common sense”.

Update: Here’s question: Is there a non-economic effect of a Stimulus Package that can lead to a positive economic outcome (keeping opportunity costs in mind)?

John Maynard Keynes

2 Responses

  1. I’m sympathetic to this post.

    That said, when credit begins to collapse, the effective money supply starts falling. So in crises like the current one, when the government effectively creates money, it is offsetting wealth that has been lost by a bigger risk premium.

  2. I understand the actions to take to unfreeze credit.

    What is being suggested as the stimulus is mostly make work and consumer rebates. It will not have a positive effect. There is no history of that ever working. Ever.

    Bailing out Detroit, and the Obama spending ideas have nothing to do with the unfreezing credit. They will take money from somebody else, to spend on they (the political managers) think it should be spend on to help the country and to help their political selves (and not in that order).

    An easier way…allow new capital purchase by businesses to me expense immediately. This would accelerate plans they all ready have. The politician won’t like it becuase it is not the politicians calling the shots.

    They are are a few big gov spending projects that might make sense on their own as public goods (but they will not have a stimulus effect):

    – A cleanup and upgrade of national, state and local parks (true public goods)

    – Building a network of smart power grids (future commerce can make of this)

    – Brownspace cleanups – It has to be done some time.

    Note: I do not list building schools or “going green”.

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