The Resurgence of Keynesian Economics
The key to understanding the proposed benefits and limitations of the proposed stimulus plan lies in grasping the basic tenets of Keynesian economics. Keynes’s theories began to fade in popularity towards the end of the seventies.
For nearly thirty years, businesses and investors lobbied for market deregulation; and government played a minimal role in monitoring the activities of the private sector.
While inner cities became desolate, bridges and roads crumbled, and schools deteriorated, the income gap expanded at the expense of the middle and working classes, bubbles grew and burst, and the country now finds its financial markets pushed to the very brink. Currently, many economists are arguing that the resurgence of Keynesian economic policies is the only thing that will stave off a depression and lift us out of this already deep recession.
Who Was Keynes?
John Maynard Keynes was a born in Britain in 1887. As one of the most prominent economists of his day, Keynes served the British government in a variety of positions. From setting monetary policy, to being a representative at the Treaty of Versailles, Keynes was able to find numerous practical applications for his economic theories.
It was during the middle of the Great Depression that Keynes wrote his magnum opus, General Theory of Employment Interest, and Money. Published in 1936, this book is considered the foundation of macroeconomics.
Tenets of Keynesian Economics
Keynesian economics is centered around the premise that governments should play an active role in promoting economic policy and regulating the private sector. Keynes believed that modern capitalist economic policies will not find an appropriate balance between the public and private sectors because capitalists will always push for less regulation and more unfettered access to markets.
Rather than a strict focus on deficit spending, Keynes’s policies are more counter-intuitive. Keynes supported doing what is considered contrary in business cycle contractions. Of primary concern to us, Keynes argued that during recessions/depressions, governments should make up for the loss in aggregate demand. Let’s examine how this would play out in our current recession.
Keynesian Economics and the Recession of 2008/2009
We are in the part of our recession where job instability leads to depressed consumer demand. Depressed consumer demand leads to decreasing prices and companies needing fewer “supplies”. Thus, businesses cut production, fire workers, and reduce hours in order to maintain some semblance of a bottom line.
The cycle repeats itself until consumption and production grind to a halt. Economists recognize that consumers are not going to spend their way out of this recession. Keynesian economics contends that governments must either increase the money supply or stimulate production by purchasing goods and services.
This resurgence in Keynesian relevance began with the nationalization of Fannie Mae and Freddie Mac and continued with the initial bailout of the financial markets. Keynes’s resurgence was further evidenced within the broad outlines of Mr. Obama’s proposed economic stimulus plan and the near unanimous agreement that such a plan is needed.
Of course everyone is arguing over the size and the scope of the plan. However, not very many people are questioning the need for drastic government intervention in the economy.
The main problem many Keynesian economists have with President-Elect Obama’s plan is that they believe it is insufficient and will not make up for the $2 trillion dollar gap in consumer spending. Even though they are attempting to influence key portions of Mr. Obama’s proposal, conservatives also understand that passage of the stimulus plan is a foregone conclusion.
John Maynard Keynes is one of the most influential economists of the 20th century. From the time when his ideas fell out of favor, you can draw a straight line from that point to our current financial crisis. Since Keynesian economics is providing the basic blueprints to end our current recession, and now that we are at least speaking a common language of recovery, I am a more optimistic that we will see our way out of this crisis.