Monday, January 26, 2009

Questions on Keynes

I just listened to Russ Roberts podcast on Keynesian economics – especially in relationship to the current economic situation.

Before I get to my question I would like to commend Roberts on his ability to be gracious to his guests.  I find myself nearly jumping out of my seat wanting to challenge his guests on one thing or another.  Roberts lets his guests have their say, he will challenge them – gently – on some of their points, but for the most part makes every attempt to make sure that their points are understood or understandable by his listeners.  If you do not regularly listen to EconTalk then you are really missing out on one of the most educational hours that you could possibly had.  I can’t recommend it enough.

Now on to Keynes.

So, if I understand the Keynesian perspective correctly, recessions are caused by a lack of demand.  In order to correct the lack of demand the Keynesian remedy is to have government replace that demand by spending lots and lots (and lots and lots and lots) of money, thus replacing the lost consumer demand with government demand.

So take the current stimulus as an example.  Consumers are spending as much as they used to which has led to a recession.  The Obama economic team wants to ‘fix’ this by having the government spend close to a trillion dollars, thus replacing the nascent consumer demand, thereby stimulating the economy.

Now, if the stimulus was implemented in a best case scenario with all of the money spent in 2009 on projects that are ‘necessary’ – what happens in 2010?  Doesn’t this new lack of demand put us exactly where we started?  How is this a long term fix.  It seems to me that Keynesian stimulus can be nothing but short term in effect.

Am I missing something?

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