Keynesian method

This cartoon created by Barry Deutsch is a perfect example of Keynes economic theories. It argues that private sector decisions are sometimes not the best in terms of outcomes, because of this Keynes advocates active policy responses by the public sector, including monetary policy actions by the central bank and fiscal policy actions by the government to stabilize output over the business cycle.

Many are opposed to the Keynesian method, which includes banks, large corporations and “Wall Street Rocket Scientists” (Krugman New York Times, 9/2/2009). They cite that if you use Keynes method of deficit spending of the government’s budgets to stabilize the economy will lead to higher unemployment and inflation. Another opposing argument is that while at one time government stimulus was needed in a time period of the Great Depression, today’s economy is too advanced and diversified for stimulus money to be effective as it was during the Great Depression. We, governments and industry, understand the issues which caused the depression and we have the “know how” to avoid the same pit falls.

So many are in favor of little government involvement in the economy and will argue against Keynes until their method slips and begins to fall like the “American Guy” in the cartoon. As he falls, he holds up his hand and looks for Keynes to help him out. Figuratively this is exactly what our country as well as the world economy does during a downturn. Monetary policy is adjusted constantly to help stimulate financial lending and currency exchange of other countries to help stimulate your countries exports. When the economy is growing nobody in our capitalist society wants any government involvement, until the economy takes a significant downturn. We then collectively hold out our hand for the governments help. In comes Keynes and his theory of using government stimulus to stabilize the economy; extended unemployment benefits, low interest rates, government spending.

An example of this is our most recent recession, where after almost 30 years of sustained economic growth, with a continuation of less and less government involvement. Banks with less government regulation and control looked to continue to expand profits. They began to write higher risk loans, poorly regulating themselves and reach a threshold of collapse. Some would argue, this is capitalism and bad businesses, should fail. The situation in 2008 was so widespread, it had halted the flow of cash through the credit market and if allowed to fail, all of the major bank would have come crashing down. So, as in the cartoon, the major banks held out their collective hands for $700 billion dollars. Right behind the banking industry, came the auto industry with GM and Chrysler looking for a bail out.

Has Keynes stopped the second Great Depression or only pushed it further downstream? If we look at the past two years, it seems the stimulus has allowed the economy to start to recover or at least slowed the failure. Time will tell if the economy will recover completely, but the signs are positive, unemployment is slowly being reduced; housing purchases are no longer declining. The outlook seems brighter than in 2008, but the federal deficit hangs over like a dark storm. The answer lies within the balance of pure capitalism and Keynes.

http://www.leftycartoons.com/regarding-the-ongoing-irrelevance-of-keynesian-economics/

http://www.nytimes.com/2009/09/06/magazine/06Economic-t.html?pagewanted=2&_r=2