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Politics : Don't Blame Me, I Voted For Kerry -- Ignore unavailable to you. Want to Upgrade?

To: Original Mad Dog who wrote (6253)	3/10/2004 8:52:01 PM
From: CalculatedRisk	Respond to of 81568

Keynes and deficits: In the 1920s it was considered immoral for the government to run deficits. This attitude prevailed both in the US and in the UK (Keynes was British). With the onset of the Great Depression, the US government couldn’t help but run deficits. Ironically, one of FDR’s criticisms of Hoover was his deficit spending!<g> And then along came Keynes. He argued that it can be helpful for a government to run a deficit during slow economic times, as long as the government’s policies lead to job growth! Some people forget the “job growth” part of the equation. Keynes reasoning was based on something called the Kahn multiplier effect (after R.F. Kahn, a somewhat less known economist). It really is a simple concept. If the government spends enough to create a job (through tax cuts, incentives to companies, directly hiring people, burying bottles full of money, etc.), that person will spend enough money to make the deficit spending worth while. A well chosen policy has a Kahn multiplier of around 3. A poorly chosen policy can have a negative impact. Keynes further argued that the deficit could be paid off in good times (he misjudged the pressures on politicians!). The common wisdom has become: (as you quoted from Wikipedia), “Keynes advocated counter-cyclical fiscal policies: deficit spending when a nation's economy was sluggish and the suppression of inflation in boom times by either increasing taxes or cutting back on government spending” If you followed my discussion, you see the error in this description. Where is the job creation (based on proper policy choice) during periods of deficit spending? It is missing from the description of Keynesian economics! A few more comments: 1) I provided you that paper from 1919, to show how Keynes approaches analyzing public policy. Keynes didn’t propose his deficit spending / job creation ideas until the mid 1930s. Sorry for any confusion. I recommend the paper as a way to understand Keynes (it is very readable). 2) My analysis is that Bush’s fiscal policies actually have a negative impact on the economy. Let me correct another piece of common wisdom: some people think (Like Larry Kudlow) that deficit spending is inflationary. The correct answer is: it depends. Bush’s deficit is in fact deflationary! To make up for Bush’s poor policies, the Fed is pedaling as fast they can (lowering rates) to try to re-inflate the economy. This has kept housing and consumer spending afloat. But, since we have fiscal and monetary policy working against each other, we are also creating serious imbalances in our economy. The analogy I’ve used before is that the Fed is pumping air into an inner tube. But the tube has a weak spot and instead of inflating the tube, the weak spot is bulging out of the tube. We need to patch the weak spot (fiscal policy) before we can properly inflate the inner tube. Best to you!