Keynesian Stimulus Spending

The standard interpretation of Keynesian economics is that when unemployment is too high and the economy is not growing, the problem is a lack of aggregate demand.  Businesses would supply more goods and services, thereby boosting employment, if only people were out there buying.

If households aren't creating demand because they have no money and cannot borrow, government will have to fill in the gap for the short term.  The government can borrow more money than it takes in from tax revenue.  This deficit spending stimulates the economy by putting money back into peoples' pockets.   As they spend that money, business start expanding, and begin hiring, taking up the slack from the government.

The key idea is that a short term burst of spending will stimulate the economy, leading to a virtuous cycle of an  expanding economy and increased hiring.  That is the basic theory, as I understand it.  The longer I look at the economy, the more convinced I become that the theory doesn't work.

For example, consider Christmas.  Millions of households have spent recklessly buying presents this holiday season, charging their purchases onto credit cards.  In anticipation of this surge of economic activity, many businesses added on employees for the season.  So far, so good.  Short term deficit spending leads to increased hiring.

But now look at the sequel.  Now that the holidays are over, those short term, part-time positions are being eliminated.  No long term virtuous cycle has been started.

Or consider the case of Ohio and Pennsylvania.  both were battleground states in the last election, which means they were saturation bombed with political ads from both parties.  In addition to mass media buys, political operatives were parachuted into those states from all over the country, and those individuals spent freely.  Tons of money were pumped into those states, providing tons of short term stimulus spending.

Have Ohio and Pennsylvania become economic dynamos since the election, with big growth and massive hiring?  I haven't seen any evidence of it.

When stimulus spending fails to have the desired result, Keynesians always claim that the problem was not a with the theory, but that the stimulus offered was too small. or did not continue long enough.  The beauty of that argument is that it offers politicians something very appealing: they get to hand out money without having to raise taxes.

I don't think our political class is going to reject Keynes and his theories anytime soon.