Earth To Keynesians, Government Spending Isn't Demand

RCM ^ | 07/15/2013 | Jeffrey Dorfman

[SeekAndFind]

Keynesians continue to claim the recent recession and weak recovery have as their root cause a shortage of demand. If only the government would spend more money in the short run to augment demand from the private sector, we could fully recover. At that point, miraculously, the economy begins to generate sufficient demand on its own to replace the temporary government stimulus spending and the government can go back to business as usual.

The problem with this scenario is that it misunderstands the role of demand in an economy and it also equates continuing, private sector demand with temporary government spending. Unfortunately, these two sources of demand have very different economic impacts.

First, demand cannot produce economic growth on its own. At its most fundamental level the economy is the sum of transactions between buyers and sellers, a giant marketplace where people and businesses trade goods and services for money. The key part of this concept is that every buyer requires a seller; you cannot buy a product unless somebody has manufactured it and is ready to sell. If the supply of goods to sell is unchanged, an increase of demand simply results in bidding wars among buyers and higher prices.

It is not the dollar size of an economy that counts, but its real size measured in terms of the amount of goods and services produced and sold. People want more money only to the extent that they can use it to buy more stuff (which can include savings or investments). More demand without more supply does no good, since it does not result in more goods and services being produced.

Clearly, Keynesians are not trying to simply raise prices by augmenting demand with government spending. That would produce no real economic growth, only inflation.

[edcoil]

It is “spending” plenty with 85 Billion a month but, those getting it are keeping it and not spending it. This is no cash flow, it is just a big private bucket.

[BenLurkin]

[rusty schucklefurd]

re: “If only the government would spend more money in the short run to augment demand from the private sector, we could fully recover.”

And just how much money would that have to be?? I mean after spending how many trillions of dollars on bail-outs, stimulus 1, 2, and how many? I’ve lost count. After all that and we are still struggling?

Maybe we should try something else. What’s the saying, “if you keep doing the same thing over and over and you keep getting the same results - failure - to keep on doing it not a strategy it’s insanity.

[Sherman Logan]

What’s the saying, “if you keep doing the same thing over and over and you keep getting the same results - failure - to keep on doing it not a strategy it’s insanity.

Their answer - not one I agree with, BTW = is that the stimulus injections have always been too little, too late. IOW, it's never been done right.

Much like the (accurate) claim that Communism has never been done right.

The issue they never address is whether it is possible to do either right.

[KarlInOhio]

The Keynsian's theory (I don't know if it in Keynes' original work or later handwaving by his fans) doesn't seem to cover that when the government spends it must come from either taxing more, borrowing more or printing more money. The first reduces everyone else's demand because they have less. The second would (in a sane interest rate environment) increase rates and thus limit borrowing for consumer spending or investments in production. The last would cause inflation which could boost demand if everyone starts buying groceries at lunch time before prices go up again in the afternoon.

[headstamp 2]

The Keynesian philosophy is essentially that government can spur economic growth by spending dollars it pulls out of its ass.

[The Great RJ]

The fallacy of Keynesian ideas of government spending stimulating aggregate demand is easily explained. Where does government get the money for economic stimulus ? The only sources are taxes and borrowing. How can aggregate demand increase if consumers have less disposable income due to higher taxes and investment in private businesses is crowded out by investors buying government debt?

[mjp]

If only the government would spend more money in the short run to augment demand from the private sector, we could fully recover.

Government spending is mainly consumption expenditure rather than productive expenditure. Funds which are used for consumption expenditure are unproductive and are used up, and eventually simply disappear.

Also, changes in government spending cause changes in the pattern of aggregate demand in the economy as a whole. When government spending is increased, it leads to increased aggregate demand for consumer's goods and lower aggregate demand for capital goods. A lower relative demand for capital goods compared to demand for consumer's goods leads to reduced ratio of production of capital goods to production of consumer's goods, which leads to lower production of capital goods, which leads to lower supply of capital goods, which leads to less total productive ability overall, which leads to hampered capital formation and capital accumulation.

Nothing could be more damaging to the true interests of the economy as a whole in the long run, and the standard of living of the average wage earner, than to hamper capital formation and accumulation.

Finally, trying to stimulate the economy by increases in government spending is addictive. When the rate of increase in the money supply is slowed down significantly, the economy will start having withdrawal symptoms in the form of a new recession.