Economic Stimulus (From a Layman Perspective)

By: Inoljt, http://thepolitikalblog.wordpress.com/

There is something very fishy with Keynesian economics and the theory that government stimulus best fights recessions.

Before I continue, I should note that I am entirely unqualified to offer this critique of a fundamental economic tenet. I do not have a Ph.D in economics; nor do can I offer any alternative to combating recession. Nevertheless, here are my non-intellectual thoughts on the matter.

The best test of an economic principle (or any principle, for that matter) is in the field - in real life. For example, reality contradicted the economic theory that financial markets are rational in a particularly memorable way. On the other hand, reality supports the principles of supply and demand.

As far as I can tell, the "reality test" for economic stimulus has had quite mixed results. Two stimuli come off the top of my head: Franklin Roosevelt's New Deal and Japan's response to its 1990s housing bubble. The New Deal, while popular and praised to this very day, did not end the Great Depression. Likewise, Japan's stimulus also did not stop its Lost Decade.

Supporters of Keynes, in response, assert that both Roosevelt and Japan needed even more stimulus; both cut back government spending when they should have spent even more.

To me, this argument recalls the saying, "The definition of insanity is doing the same thing over and over again and expecting different results." It's as if a medieval doctor proposes "bleeding" a sick patient. Upon seeing that bloodletting is not working, the doctor concludes that the patient needs even more bloodletting - when in reality the doctor's "cure" is only making the patient sicker.

The analogy is probably exaggerated; after all, WWII government spending did end the Great Depression. As stated before, the "reality test" has not proven one side right.

What is certain is that more test results are upcoming. The general response to the Great Recession has been economic stimulus; we shall see whether or not it works fairly soon. I hope the evidence goes against my suspicions. I fear it will not.

Tags: Economic Stimulus, economics, Economy, Great Recession, Insanity, Japan, John Keynes, Recession, roosevelt (all tags)

Comments

3 Comments

Re: Economic Stimulus (From a Layman Perspective)

From a layperson's perspective, your analogy about bloodletting makes no sense.  Here is a more appropriate analogy related to illness.

When you are sick, you give your body resources (rest, medicine, tender loving care, nutrients) so that it will recover.  You don't worry about working hard and saving money when you are sick.  In fact, you recognize that the rest and care you give your body when you are sick may put you more in debt.  However, it will help you become healthy so you can tackle your debt by working harder when you become healthy.

When our country's economy is sick, it needs more resources until we recover.

That's a much more logical analogy from a layperson's point of view.

by markjay 2009-11-03 02:24AM | 0 recs
Re: Economic Stimulus (From a Layman Perspective)

Your FDR and the depression comment is slightly off the mark.

One you are right FDR did not end the depression. We finally fully came out of it with the onset of WW II. However had FDR and the Fed not intervened I shudder to think how much deeper it might have been. And because of that deepness would we have been in  place from a manufacturing stand point to respond as quickly to the onset of WW II?

Two, as you may recall, in 1937 there was a recession brought on by pressure from the Republicans to balance the budget and government spending was cut. Roosevelt soon realized this error and started spending again.

And even during the War the government still had to intervene. For even with 17 million men entering military service and factories gearing up to supply the war effort there still were not enough jobs. So the government instituted cost plus contracts. Where the government subsidized the hiring. The more a company hired the greater a companies profit.

Wiki

The government began heavy military spending in 1940, and started drafting millions of young men that year; by 1945, 17 million had entered service to their country. But that was not enough to absorb all the unemployed. During the war, the government subsidized wages through cost-plus contracts. Government contractors were paid in full for their costs, plus a certain percentage profit margin. That meant the more wages a person was paid the higher the company profits since the government would cover them plus a percentage. Using these cost-plus contracts in 1941-1943, factories hired hundreds of thousands of unskilled workers and trained them, at government expense.

So what many fail to take into account is that without FDR stepping in would we have been able to recover at all. Would so many factories have closed that gearing up for WW II been near impossible. From my perspective I think we are fortunate that we never had to find out.

by jsfox 2009-11-03 03:12AM | 0 recs
Re: Economic Stimulus (From a Layman Perspective)

lots of economic ignorance in this diary

the New Deal worked - the "recession" part of the depression was over by the end of 1933 (positive GDP growth. By 1937, unemployment was down near optimal levels. In fact, unemployment had dropped by 15%+.

It was only when they decided to cut spending to try to balance the budget that the economy fell apart again.

Finally, WWII was a gigantic stimulus, so arguing that it was what brought us out of the Depression is not an argument against Keynesian economics.

by jeopardy 2009-11-03 09:43AM | 0 recs

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