How to do Deficit Spending or The Trouble with Keynesianism December 8, 2011

The prescriptions of John Maynard Keynes have been controversial since his time:  the idea of deficit spending for “priming the pump,” the idea of the “paradox of thrift,” and others that seemed to go contrary to traditional financial virtues.  Many have blamed John Maynard Keynes, in fact, for the fact that America’s national budget is usually in a state of deficit.  It’s a bit more complicated than that.

Keynes never advocated deficit spending in times of prosperity.  The trouble with his theory was not so much economic as political; since the state must cut back its spending in times of prosperity, who volunteers to be the thing on which the state spends money in hard times but cuts off money in good times?  [Ominous silence.]  I didn’t think so.  So, while I would hold that deficit spending in times of recession is legitimate, there are only two types of things that I would spend deficit money on:

  1. Unemployment insurance.  Assuming that a “recession” or “depression” is defined mainly as a period of high unemployment, deficit money can be spent on unemployment insurance, because the amount of money spent will automatically decrease if the economy pulls out of recession.  Other forms of welfare that do not vary much with the unemployment rate, such as welfare [including Social Security, food stamps, and the like] and health care, must be covered by tax money.
  2. Infrastructure projects, of the kind that have a defined completion.  These are also the kind that politicians like, because they can have ribbon cuttings at the end and have their pictures taken.  Unfortunately, we are short now in America on maintenance of existing infrastructure.  And maintenance of existing infrastructure is a never ending thing.  It is said, for example, that as soon as they finish painting the Golden Gate Bridge, they start over again.  Because of this, maintenance of infrastructure needs to be paid for by higher taxes, if necessary, not by deficit spending.

If deficit spending is devoted exclusively to things of these two types, it should not have to be a permanent phenomenon, as it has become, but as Keynes never intended it would be.

One Comments
speotter 12/09/2011

If the government spent their money like the average American family USED to do, then Keynes’ ideas would be on the garbage pike of stupid theories for good. Government, instead of cutting spending during good times, should actually develop a reserve.  Then there would be no deficit spending required during bad economic times.  And if families, maybe because of the good example of the government (LOL), saved and had a reserve, then unemployment insurance wouldn’t be required.

Every dollar that the government takes out of the economy is one less (or maybe more like $1.90 less) out of the private sector.  I would rather have the church step in to help those in hard economic times rather than having everyone being forced to help through inefficient government.

You don’t develop that victim class of Occupy Wall Street thinking that they “deserve” other people’s money, when it comes from the church and you know that it came from your neighbors, not “somebody else”.

So Keynes started out with an incorrect assumption.  That was that government is the solution, or that government was the ONLY solution. Before Woodrow Wilson, this country was very independent.  150 years of fearing a large central government served us well.  Ah but I get nostalgic…

Let’s hope that with Obamanomics we can finally bury Keynes and his theories permanently.

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