The Dark Side of Keynesian Economics

1. The Dark Side of Keynesian Economics Mr. Way, 2/14/12 12.3.3 Describe the aims of government fiscal policies (taxation, borrowing, spending) and their influence on production, employment, and price levels.

2. Maybe It’s Just A Waste • There is no way to prove that stimulus spending can jump-start an economy • No recession has ever lasted forever, meaning recovery happens naturally whether or not government intervenes. • Does a stimulus speed it up, slow it down, or have no effect? You can’t ever know, because you’d have to go back in time and see what happens with and without one.

3. Assuming stimulus works… • Even giving stimulus spending the benefit of a doubt, there are problems with Keynesian solutions. • Who gets the money? • Inflation • Where does the money come from? • What happens to gov’t spending programs after the recovery?

4. Who gets the money? • Keynesian theory says that it doesn’t matter who gets government money as long as they spend it afterwards. • This means that politicians will use the money to benefit their friends and allies • Theoretically, everyone will benefit, but clearly some are benefiting much more than others based on political connections.

5. Inflation • When government dumps money into an economy, this effectively shifts demand curves outward. • Although this will increase production, as intended, it will also increase prices. • Increased prices = inflation

6. Inflation (2) • Rising prices mean that even though more people may be employed, their wages won’t buy them as much as they used to. • Rising prices during a recession are particularly painful to the people who didn’t get government money and still can’t find a job. • Decreasing the value of peoples’ savings means that anyone who had saved money is less likely to spend since their savings decreased.

7. Where’d they get the money? • Normally, the government gets its money from taxes. • During a recession, the money gov’t gets from taxes is lower than usual because there aren’t as many people making as much. • Therefore, in order to pay for a stimulus during a recession, the government must print more money or borrow it.

8. Where’d they get the money? (2) • If the government prints up new money to pay for the stimulus, they will cause even more inflation than stimulus normally causes. • If they borrow the money, that means they have to pay it back in the future. • When I say “they” have to pay it back, I mean “future taxpayers,” which means “you, the class of 2012”

9. What happens to stimulus programs after the recession? • In many cases, once a government program is created, it finds ways to survive forever. • Examples from the 1930s include: FDIC, FCIC, FHA, TVA, Social Security, SEC, and many more. • These programs continue to drain money out of the economy through taxation, weakening all growth forever.

10. The trade-off • Government stimulus undeniably and immediately helps some people who suffer during a recession. • However, it causes inflation, which makes some suffer more. • It also creates greater dependence on the government through programs like SS • It requires that debts be repaid by future generation, weakening future growth.

11. Writing Prompt • Using an analysis of the costs and benefits of Keynesian economics, write an explanation for whether or not you support President Obama’s current proposal for more stimulus spending. (Paragraph form)