John Keynes still lives strong in Economics, it seems lately. His idea is that in order to get out of a recession, you must increase government spending and run a deficit for a little while. This would stimulate aggregate demand, which is the same as when you heard stimulating consumer spending. Barack Obama’s economic advisors have came and out said that Obama will increase government spending and lower taxes. The Financial Times has it here:
“The Obama economic team is reportedly considering a plan in the $675bn-$775bn (£462bn- £531bn) range, but some analysts believe the ultimate size of the stimulus will be $850bn or more.
Mr Summers said Barack Obama, the president-elect, faced “what may well be the bleakest economic outlook since world war II.” He cited estimates that unemployment could reach 10 per cent next year, with an output gap between demand and potential supply of $1,000bn – about 7 per cent of gross domestic product.
But Mr Summers rejected calls to “focus exclusively on short-term policies that generate consumer spending” – saying “that approach led to some of the challenges we face today.”
We are already in a major deficit and you have to have a balanced budget in order to do what Keynes prescribed, if you assume it works. Milton Friedman and others have proven that this is not the best policy but that doesn’t stop policy makers from trying. This only works in the short-term and in the long-term it doesn’t do much. In the short-term, it boosts consumer spending and lower unemployment. Monetary policy was the prescription Friedman created after Keynes to pretty much the same thing.
This has been the goal of all government policies is to keep inflation and unemployment low, while keeping consumer spending high. This can not be sustained forever and people will have to come down. This is what this period is known as. It may hurt now but it will help in the long term. The right government policy is to deregulate and cut spending to get closer to balancing the budget.
The more debt we bring upon ourselves the more future taxes we impose upon ourselves. We cannot even return to a balance budget after fiscally stimulating, which is a huge problem in Keynes’ reasoning.
The rest is here.