Sunday, December 7, 2008

I'm Spent!

All indications from President-Elect Obama and congressional Democrats are that the government stands ready to spend massive amounts of money in an effort to revive the economy. Descriptions of this strategy of spending to overcome our economic woes often refer to this as a Keynesian approach after the economist John Maynard Keynes.

I don't know that if he were alive today he would blog for the Huffington Post or appear on Crossfire, but Keynes was an early version of the celebrity pundit that has flourished in the age of cable television. (Admittedly, Keynes was far more intelligent and better educated than your average talking-head of the early 21st century.)

Keynes saw demand as the important factor in a healthy economy and he was generally willing to let the private sector to do the demanding. He thought, however, that it was possible for the private sector to demand too little to maintain economic health and that government spending could be used to compensate for the low level of demand. Furthermore, he advocated that both fiscal (taxes and budgets) and monetary (interest rates) policies should be enacted to try and soften the ups and downs of the business cycle. In these cases the government actually intervenes in markets and attempts to fine-tune the economy.

At least since Reagan's election in 1980, this sort of direct government tinkering has been out of favor (at least in word if not in deed). Thus Keynes has been in something of a hibernation of late. These days though, he is back with a vengeance as government spending seems to be the only response that is even being considered to the current economic crisis.

Senator Charles Schumer (D-NY) has pegged the number of the stimulus package at $500-$700 billion. On her website, House Speaker Nancy Pelosi has been promoting House legislation passed in September for additional spending on energy and infrastructure.

In his radio address yesterday Mr. Obama began to outline his approach to attacking the economy. He indicates his plan has several parts, these include spending to make public buildings more energy efficient, spending on national infrastructure, and spending to modernize school buildings. The fact that all of these different "parts" are really just spending on various types of goods demonstrates just how fully the Keynesian approach has been embraced.

Later in the address though, Mr. Obama includes this passage (emphasis added):

That is why the economic recovery plan I'm proposing will help modernize our health care system - and that won't just save jobs, it will save lives. We will make sure that every doctor's office and hospital in this country is using cutting edge technology and electronic medical records so that we can cut red tape, prevent medical mistakes, and help save billions of dollars each year.

Talk about a mixed message. After outlining several areas where the government is going to increase spending in an effort to stimulate the economy, Mr. Obama goes on to tell us how the government is going to act to save money. Why? If Keynes is right and keeping up demand is what we need to do, why would we take steps to cut any spending in our economy. I mean, doesn't the guy at the red tape factory need his job too?

Perhaps this is just the sort of meaningless chatter that characterizes so much of the public pronouncements of our politicians. If so that would be sad, but not overly troubling.

Perhaps though, this reveals something of a weakness in the Keynesian approach, at least with regards to spending. One might argue that we shouldn't just spend heedlessly, but we should do it in a smart way. If it is the case that what we need is not just any spending, but a certain type of spending in order to return our economy to health, how do we know what to spend on?

Maybe I am wrong, but I am not convinced that the government will be able to implement new spending programs in a way that achieves economic growth with minimal waste. This is goes for a government run by either of the major parties. This headlong rush back to Keynes could help to improve our economic fortunes but could just as easily result in a proliferation of bridges to nowhere.


Anonymous said...

I think you are right to be worried about using the Keynes philosophy at this time. Even though FDR ascribed to it during the depression (WPA and other public works projects), these are of such different times that I'm not sure anything short of a complete
monotary collapse and radical "re-start" (complete with all the pain that implies, as in Germany 1931)will be necessary. I'm really quite pesismistic concerning Capitalism's ability to operate
for a sustained period of time in today's highly-charged world. I do think Obama is our most "forward-looking" leader in that I believe he is more aware of history (and I hope economic history in particular)than most of our politicians. I suppose the Keynes theory makes some sense at this time, but where is all the money going to come from for the bail-outs, mortgage for-givnesses,
public works, etc. The printing presses can only supply as much money as the natural resources of our country are worth (prsumeably).
The buck has to stop somewhere dosn't it?

Anonymous said...

There is a general analogy between the years leading up to the financial
chaos is Europe (especially Germany after WWl, the great depression and leading up to WW11, and today (not an exact analogy, but an instructive one. Finance (survival)was the essential cause of Germany's aggression. I know I'm not telling you anything new, but it is worth noting that both communism and fascism are more economical enemies than they are "idealistic" enemies, even though their modern counterparts would probably deny this.

Anonymous said...

Jerry, the two anonymous comments are mine (probably much to your chagrin).

Joe B said...

Hey Anon, here's how the government looks out for how it spends OUR money.

Government spending is not the answer. In a pure capitalistic environment, there does not have to be any government involvement. The supply and demand will resolve to a sustainable level.

Government involvement has thrown the natural balance out of whack into an expectation that a "healthy" economy is one that is always growing. It is clearly visible that this government is afraid of NOT maintaining a "growing" economy. They think that if they spend enough money, the economy will "grow". I wonder how long it will take for the dollar to be only as valuable as firewood.