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Why Keynesian theory doesn't work.

Quantum Windbag

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It all comes down to one simple thing, no one uses it.

I really don't remember much about Keynes' theories, mostly because the teacher taught pretty much what Krugman preaches, that deficits are good, and you should raise taxes after a recession to cover them, but if these are an accurarate description of his views I might have to take another look at them. He makes more sense than I thought he did.

While the Obama team is laying out huge sums of money, Meltzer says it's neglecting a key part of Keynes' plan: You can't run up a debt without a way to cover it.Meltzer recently sat down with Fortune editor-at-large Shawn Tully. Below are edited excerpts from their conversation.

How Obama got Keynes wrong - Feb. 5, 2010

Keynes would say the biggest problem with our economy is the deficit, and the fact that no one is trying to reduce it? Does that sound like anything that any Keynesian is saying today?

Another person that thinks Keynes would disapprove of the way the government is doing things.

I think John Maynard Keynes would be horrified at the slavish adherence to this simplistic strategy by so many policymakers and economic thinkers, as his theory was much more complex. This thinking might be correct under circumstances other than those in which we find ourselves. If the ratio of our national debt to gross domestic product was low - say 25 percent - and the federal government had run surpluses before the downturn, this college freshman-level Keynesian analysis would have great weight. Put another way, if Uncle Sam were a rock-solid financial entity with low debt to value and he had judiciously used debt for capital improvements that were accretive in value, as the biggest dog on the porch, a stimulus might work.But with a national debt of more than $14 trillion and unfunded, future “off the books” debt of Social Security and Medicare combined at $104 trillion in present value, according to the Dallas Federal Reserve, Uncle Sam ain’t the man he used to be. This in turn makes American businesses that are sitting on a pile of cash focus on deleveraging. The American consumer is doing the same. In fact, from where I sit, it appears as though everyone except Uncle Sam is working like mad to strengthen his balance sheets. The legitimate fear across the country is that Washington’s refusal to join our common-sense parade will result in higher taxes, more regulations, more inflation and Japanese-style stagflation. In other words, Washington’s attempts at stimulus through spending are having the opposite effect. Businesses and consumers stay hunkered down.


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Modern Keynesians suffer from the misguided notion that government is the great engine that will restore our economy to prosperity. In fact, the great engine is a diverse system of private citizens anxious to go to work to provide for their families and build their businesses.


WHALEN: And now a word from a job creator
 

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