JULY 26, 2009 12:09PM

WHAT KEYNES REALLY ADVISED RE GOVT "STIMULUS" SPENDING"

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WHAT PROF. KEYNES REALLY ADVISED

REGARDING GOVERNMENT “STIMULUS” SPENDING"

Copyright 2009 Craig Cotora

 

“The difficulty lies not so much in developing new ideas

as in escaping from old ones.” J.M. Keynes

 

 

      While The Government debates a “Second Stimulus Plan” and The Pundits assailed the First Plan as “Krazy Keynesian deficit spending”—e.g. The Ethan Show 3-11-09; it seems a most appropriate time to take a few moments to consider what Prof. John Maynard Keynes actually advised regarding “appropriate” government stimulus spending.

      Of course, it is probably only fair that we excuse such pundifications such as “Keynesianism—the theory that the public sector should control the private sector through strict regulation...” [Ibid.] when Professor Keynes in fact spent most of his seminal work—the General Theory of Employment, Interest and Money—arguing that pro-active “appropriate” government “intervention” in the macro-economy was necessary to ensure the success of both capitalism and democracy.

     That is “fair” because one of the very few things that all economists of any “school” would agree on is that the General Theory is not “an easy read”--a fact Prof. Keynes admitted himself by spending practically the rest of his life explaining what he meant in the General Theory on the lecture circuit and in numerous articles. And what Harvard Professor Alvin Hansen wrote in 1953 appears just as true today: “Nowadays one reads a good deal of the literature about Keynes but little in the General Theory itself.”

     Actually, all one has to tackle to determine what Professor Keynes actually would advise us today regarding “appropriate” government stimulus spending is Chapter 23 of the General Theory-- in which Professor Keynes tried to synthesize the conclusions and therums of the previous 22 chapters to define what he considers “the most appropriate” role of a democratic government in the macro-economy.

      Not surprisingly—in that The General Theory was written in the midst of The Great Depression—Keynes believed that the principal purpose of government fiscal policy was to “maintain long term full employment” (hence “the General Theory of Employment...”etc.).  And more importantly regarding what Keynes would actually advise our government today regarding “stimulus” spending was that how the government spent stimulus funds was even more important than when [according to Keynes when economic indicators were “pointing to a downturn” in the economic cycle—i.e. before a recession--] and how much [an “appropriate amount” Prof. Keynes said for the economic conditions at the time.]

     As Prof. Keynes emphasized in his numerous defenses of the General Theory, “long term” full employment—i.e. not creation of temporary state road, bridge, etc. “infrastructure” jobs but creation of “permanent” ”industrial” infrastructure employment--should be the focus of government economic stimulus spending simply because this  particular type of stimulus spending creates high skill, high wage jobs, which consequently expands the income tax base, resulting in more government income tax revenues and thereby transforming government budget deficits to budget surpluses.

     Professor's Keynes current critics also might like to know, since it appears from the nature of their pundifications--such as the one quoted previously--regarding Keynsian Economics  that they evidently have not actually studied his work, that once the government realized budget surpluses from “long term full employment” stimulus  spending, Professor Keynes also strongly advocated reductions in income tax rates. 

     Besides maintaining a healthy democracy, a “primary objective” of a government fiscal policy of “long term full employment” was lowering of income tax rates. (Pop quiz for Pundits at any location on the political spectrum: Who said: “The avoidance of taxes is the only intellectual pursuit that carries any reward.”? Yes...that was John Maynard Keyes.)

     Given what Professor Keynes actually advocated in the General Theory, what would he think of the current Administration's interpretation of “Keynsian Economics”--if that is what the Adminstration's current stimulus policy is intended to be—of “bailouts” and “$ for States”? Most likely a prolonged knashing of teeth since obviously neither bailouts of failed banks, S&L's and investment houses nor $ for state road, bridge, etc. projects is the type of stimulus spending that would create “long term full employment”  which would sufficiently expand the tax base to create budget surpluses and permit the lowering of income tax rates.

     Rather Prof. Keynes would certainly advise that that Trillion Dollars [if he would have ever actually have approved of that much “deficit” spending] would much more productively be spent on grants, licenses and/or loans to corporate America to vastly expand American aero-space and “green” environmental industries—which would create exactly the kind of “long term full employment” Keynsian fiscal policy argues is required to expand the tax base sufficiently to create government budget surpluses and eventually reduce tax rates.

      There would also be other major benefits of ”long term full employment” stimulus spending in America's environmental and aerospace industies. These are all industries whose products the rest of the world would demand (in that there is almost not a single currently used manufacturing, service or energy development or consumption product or process that could not be made significantly more environmentally friendly.) 

     Consequently this type of government stimulus spending would not only transform budget deficits to surpluses, but also would convert America from a debtor to a creditor nation, as well as also easily accommodating the shifting of unemployed and underemployed American workers—particularly auto and other assembly line workers—into industries where they can still realize their American dreams with little additional re/training. [After all, if they can assemble products as complex as the modern automobile, they certainly could assemble a wide variety of aero-space and environmental machinery and/or equipment.]

     In conclusion, if the Administration really desires to apply “Keynesian Economics” to help resolve the current economic crisis and if the Pundificators really desire to constructively criticize government fiscal policy, it would be best for both camps to actually read the General Theory—or at least Chapter 23—and Professor Keynes subsequent explanations of it; simply because if the government actually applied Keynesian "long term full employment fiscal policy"—the government would not only end The Great Recession, but also restore America to being the world's leading manufacturing economy for generations to come.

 

 

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I like this. It's especially useful because, despite thinking myself a Keynesian, I don't know that I actually understood The General Theory, and your explanation is very clear and lucid. I hope the Administration does in fact invest in aerospace and green industries.

Also, you saved me the trouble of reading The General Theory, which I'd rather poke myself in the eye with a sharp stick than do, so thanks.