How's That Keynesian Thing Working Out For You?

Had you listened to the Austrian economic model today's economic news of pathetic job growth and increased unemployment would have come as no shock. However, I am aware there are still some of you that believe in Keynesianism and are dumbstruck as to why the economy isn't booming and so permit me a lesson in economics.

You see, despite $2 trillion in "stimulus spending" and lord knows how much more in deficit spending, according to the Keynesian model this spending should have rippled through the economy and via a "multiplier effect" resulted in a multiple of the original stimulus amount in economic growth. This would have shifted the aggregate demand curve to the right resulting in full production and employment. Confetti would fall, Peggy Joseph wouldn't have to pay for her mortgage, the masses would cheer and Obama's Magical Flying Unicorns would fly in formation over the cheering masses (they're kind of like the Blue Angels, but not as cool).

Now, just assuming a multiple of 5 (meaning the MPS is .2, which it's not) that means a minimum of $10 trillion in additional economic production should have occurred just on the stimulus spending alone. Divide that by Obama's 3 years in office and roughly $3.3 trillion in extra economic growth over our base of $13.5 trillion should have resulted in a GDP of roughly $17 trillion. We're still sitting at $14 trillion.



So what happened?

Well Keynesian Kiddos, your dated model might have a little flaw. The MPC or alternatively the MPS.

You see, when you are mortgaging the future of the country to the point credit rating agencies are downgrading you people have a tendency not to want to spend or invest a lot in the country. Also, when you basically villainize profits, production and capitalism, businesses and banks don't want to invest. And when you just go and blow annually $1.4 trillion more than what you take in (all while making the taxpayer responsible for this profligate spending) people in general just lose faith in the country. So instead of the "happy go lucky spending spree" your model is based upon you see people tighten their wallets and spend less. Ergo our MPS goes up and your multiplier effect goes down;



In short, you failed to account for the psychological effect of bankrupting a country and what kind of effect that might have on people's spending as well as business investment.

Of course this "magical multiplier" effect of Keynesianism was flawed from the beginning. Not because there isn't a multiplier effect, but because it has nothing to do what what really matters; genuine economic production.

Spend all the government money on "community centers," "art programs," and "stimulus programs" you want, it's not what the people wanted. And claim all you want that "additional spending" is now rippling through the economy, the fact is the government wasted that "first round" of spending on something nobody wanted. That money, had it remained in taxpayer's hands would still be rippling through the economy, but through private hands (either through personal consumption or lending via banks) and therefore producing things people wanted. Not "$50,000 drinking fountains."

Perhaps a simpler way to explain it is to aliken Keynesianism to the "why can't we just print off more money" question. You don't have to be able to answer the question to know deep down in side you intuitively know that would not solve the problem.

So perhaps in your next economics class in college you can ask your economics "professor" a variant of that question with the presumption Keynesianism works.

"If the government can spend its way out of a recession, why can't the government just spend enough to spur enough economic growth so that we're all trillionaires?"

I myself would love to hear the answer to that question.