Keynesian Economics Explained: What is it? How is it Implemented? Why doesn’t it Work?

Keynesian Economics

I’ll be frank with you… many Americans are downright pathetic when it comes to economics.

They don’t know much, if anything about how the economy works. And it’s a problem you and I are having to deal with today.

Politicians, economists, and misguided hippies think they can throw money at the economy to fix it. But it doesn’t work that way.

It might work when you’re planting a “victory garden.” You can spread the seeds anyway you like. You can even sprinkle water like a drunk Russian spilling his vodka all over the pavement.

It’s a garden. How bad can it get?

But that’s not how the economy works.

However, John Maynard Keynes would say otherwise. His economic theories have influenced politicians ever since the Great Depression, regardless of party affiliation.

And the US is still feeling the effects of Keynesian policies to this day.

This is why it’s necessary for you to understand what Keynesian Economics is.

  • It’s a failed economic policy, but few Americans know that.
  • It’s the foundation for Big Government, but few Americans realize it.
  • It wastes your hard earned money, but nobody tells you.

Do you want to be informed? If yes, then let’s get started.

What is Keynesian Economics?

I can go at this two ways. One from a strictly economic theory viewpoint, or one from a policy standpoint. I’ll be focusing mostly on the policy side of things. It’s easier to see the ramifications, not to mention understand it.

Simply put, Keynesian economics is the idea that the Free Market can be tweaked through government intervention. This “tweaking” translates into pumping money into the economy 90% of the time. It’s important to know that Keynes’s economic theory doesn’t consist solely of deficit spending.

The main themes behind John Maynard Keynes’s economic theory are that…

  • Insufficient spending causes unemployment
  • Stimulating demand can raise spending and lower unemployment.
  • Wage reduction during recessions makes the situation worse
  • Excessive saving encourages recessions and depressions
  • Balanced government budgets tend to worsen economic troubles
  • And, active government policies help a slacking labor market (i.e. unemployment)

Instead of hunkering down during economic hardships, Keynes advocated for the opposite of that.

Lowering taxes, removing government regulations and reducing government spending are the typical responses taken by classical economists. Increased deficit spending, taxes, regulations and government control in the market are the typical Keynesian responses.

Keynesian Economics then, is the excessive use of the government to fix the economy. It believes that the state can remedy the ills of the market.

Why Doesn’t it Work?

Deficit spending is a big part of how Keynesian economics is used in the US and other nations.

What is deficit spending? Well, it’s when the government borrows and spends a ton of money. This money is directed into public sector and welfare programs that are meant to raise consumer spending. You can’t spend money if you don’t have a job.

To Keynes, unemployment was a problem that the government had to fix. The best way to fix it is by hiring unemployed Americans. Who hires these people? The government does.

Now here’s the fun part…

The government pays these new employees right?

Where do they get the money to pay them?

From taxes on products, businesses, income, etc.

What do these once unemployed government employees use to buy their goods?

They use their government paychecks (aka taxpayer money).

Keynesian Economics Image

You smell where I’m stepping?

The reason why deficit spending doesn’t work is because it’s a circular cycle. Here’s what I mean…

It’s like if your friend took a twenty dollar from you, waited a few hours, and then gave it back to you after you cut his grass.

Did you earn anything back? You had the exact same amount of money in the beginning.

Keynesian Economics: taxing the employed so the gov. can fix highways that didn’t need fixing. (Click to Tweet)

This is the essence of Keynesian Economics. The government gets its revenue from Americans through taxes. You have to raise taxes and borrow to do deficit spending. That means there’s less money in the private sector. Later on, the government gives it back, saying it’s “stimulus.”

But in reality, they’re handing you back money you already had before they taxed you.

The only stimulus that’s happening is to the coffers of the state and politicians.

Why the State Can’t Create Demand

One factor of Keynes’s belief is that low spending, coupled with a low demand for goods and services, causes unemployment in economies (especially in recessions).

His answer to this is to use government policies to create demand, or at least increase it.

This is a gross misunderstanding of how the market works.

The government can’t control market forces. Whenever it tries, it fails miserably. Corruption and monopolies ensue, as do price hikes and unemployment.

Ever heard of the Invisible Hand of the market theory? It says that there’s an invisible force that guides market actions and keeps everything in working order. This isn’t some weird cultish spiritual doctrine. It’s the principle that the market can self-regulate itself without outside forces (i.e. the state) intervening.

You can’t control that. It’s not possible.

Where the gov. tries to control the market, corruption & waste occur. (Click to Tweet)

Creating or boosting demand means that you’re going against the natural flow of the market. You’re fighting the consumers’ power by saying they should want a specific product more than they do.

Why Government Jobs Are a Lie

Keynesian economics claims that it can fix high unemployment through government work programs. Either the government hires workers directly, or they hire them indirectly (building highways, dams, etc).

How does the government fund these job creation programs?

They can do it by taxing, borrowing, and printing money. All three choices hurt the economy one way or another.

  • Taxes reduce consumers’ disposable income, which means demand for clothes, appliances and other goods will go down. This then affects employers who then lay off employees.
  • Government borrowing increases the price of lendable funds, which limits the amount of investment open for the private sector. This means less factories, companies, and expansions will be built.
  • Printing more money increases inflation, which lowers the purchasing power of the dollar. It also leads to increased unemployment.

Then there’s the David-Bacon Act. The act provides for public work programs to pay their workers the “prevailing wage” in the area. That means government work projects must pay their workers the majority wage paid to laborers in the particular region.

However, the prevailing wage has come to be known as the union wage. Union wages are routinely viewed as the best in a community and are routinely adopted for government work projects.

As you know, unions aren’t known for their low wage standards. As a result, public work programs are paying their laborers jacked up salaries that go against supply and demand laws.

The high wage job that’s created replaces low wage jobs in the area. As always government jobs kill private sector jobs.

Also, most of the money allocated toward public work programs don’t go to pay laborers. The majority of it pays administration fees.

The federal government’s own Office of Management and Budget (OMB) reported that during the 1970s only 2 per cent of all the money allocated for local public works programs went to persons previously unemployed. Much of the money apparently went to “the lawyers, accountants, engineers, and consultants” brought in to plan the programs and to workers already employed. [emphasis added]

Why can’t the government create jobs? Because it takes money from the private sector and uses it to pay hiked up wages and government employees who enjoy comfy jobs.

Two Popular Examples of Keynes’s Economics at Work

I could name several examples of Keynesian economic policies at work. But for time reasons, I’ll leave you with two specific real world pictures of it at work. The first is the New Deal, and the second is the recent stimulus packages.

Why is the New Deal the first example?

The New Deal was one of the first large scale stimulus programs in American history. You could argue that it legitimatized deficit spending in American politics.

Between the NRA allowing companies to create monopolies propped up with government force. To the AAA totally messing up the agricultural industry. All the way to CPA and WPA programs putting Americans to work building dams, roads, sewers and the like.

The New Deal spent money the US didn’t have to fix a problem they had no business in.

At the core of the New Deal was the belief that the government could solve the spending, manufacturing, and unemployment problems the US was facing.

Put Americans to work with government programs. Bring spending up by allowing businesses to raise prices and wages, while cutting supply. Stop farmers from overproducing by paying them to not grow crops and destroy sections of their crops and livestock.

Why is the New Deal a perfect example of Keynesian economics at work? Because it used massive deficit spending measures to pump the economy back to life.

Why are the recent stimulus packages the second example?

Yes, there have been several stimulus programs over the past few years. In 2008, Congress passed the Economic Stimulus Act, costing around $152 billion. The American Recovery and Reinvestment Act of 2009 was passed in 2009, and will cost over 831 billion between 2009 and 2019.

Another stimulus package is being pushed by Obama. It would cost around $302 billion and would include a $600 million grant program to create jobs rebuilding infrastructure.

Deficit spending (these costs are being added to the debt), job creation programs, and private corporations being given government aid to stay alive (too big to fail).

This is Keynesian economics in action.

Stop gov. stimulus and let the “too big to fail” businesses fail. Say no to Keynesian Economics. (Click to Tweet)

Conclusion

Believing that Keynesian economics works is the wider of the two paths. It’s the easier one to walk on.

It doesn’t take much faith to stick to and trust.

The narrower path is believing in the Free Market. It’ll work itself out.

However, if you’re feeling like screwing things up then government intervention is the way to go.

Keynesian economics is the art of control. You’re trying to control the market through government programs and money pumping. You’re trying to take matters into your hands. You think you can tweak the economy.

Well, you’d be wrong.

You can’t control, manage, or tweak the market.

You can’t do it with government regulations, stimulus, or agencies. You can’t do it, period.

This is the ultimate failure of Keynes’s theory. He thought he could mold the market into something better by way of government interference.

He was wrong.

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About John-Pierre Maeli

Keeping it simple and crystal clear, because anything else is useless. I'm here to not only inform you, but to also connect with you. That's what The Political Informer is all about. Feel free to follow me on either Twitter or Google+ Let's talk!

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