All About Keynesian Economics
Right now we are finally getting out of this economic recession and seeing significant job growth for the second straight month thanks to President Obama. He has employed economic Keynesianism in order to jump start the economy with his stimulus plan and it is working. We can see the results every day around us. The stock market is significantly higher than it was a year ago and Americans all around are spending more. Profits for companies are rising as Americans are comfortable spending more money. But then again, Keynesianism has always worked, so why would any of us be surprised?
First of all, what is Keynesian economics? According to James Q. Wilson, a current professor of Pepperdine University, Keynesian economic theory believes that government needs to create the right level of demand. According to the laws of supply and demand, less supply and more demand leads to higher prices and the opposite leads to lower prices. Keynesianism holds that it is the government’s job to make sure that the level of supply and demand is just right to sustain healthy prices. An example of this is that the government might buy excess corn crops in a year when there is more supply than demand. Ergo, the supply would remain the same so that prices do not fluctuate. If there is too little corn and high demand, then the government would pay farmers to grow more corn. Essentially, the government simply spurs economic balance and growth.
So how does this compare to other economic theories? Well, conservatives tend to support “side supply” or “trickle down” economics. The problem is that according to history, these conservative theories do not work. If we learn anything from history, we will see that conservative economic policies have caused recession and depression. We can also see that recession and depression in America were caused during times when there was less government regulation in the economy. What a coincidence… Now to the argument; lets take a look at a condensed version of modern American History.
The 1880‘s and 1890’s, otherwise known as the Gilded age, were a time of little to no government interference in the economy. “Robber Barons” such as Andrew Carnegie, John D. Rockefeller, J.P. Morgan, and others basically ran the economy however possible to increase their profits. They often treated their workers poorly because it was cheaper than treating them well. (I Emphasize a little bit, but it is easy to see how this is possible) These individuals formed monopolies and trusts to ruin the competition and make even more profit. The government at the time, run by Conservative, helped these rich individuals keep their fortunes. Long story short, taxes were low, there were a few rich men who owned everything, and profit motivated action. Speculation was also rampant because there was so much money floating around and no one knew what to do with it. And then BAM the panic of 1893 came and caused a depression until 1897. No regulation led the worst to depression in history, until the Great Depression. Depression resulted because of conservative, trickle down theories with a few rich people owning the economy.
Next came the Great Depression. Throughout the 1920’s Americans were enjoying the prosperity of the post war era. Society was changing and once again business had more influence over the economy because people were happy with the way that they lived. For about a decade, Presidents ran for office on the idea of more market freedom, because it worked and improved everyones’ lives. Productivity was everything. Companies produced more goods at lower rates to undercut the competition which was great for them, but they could only go so far. Eventually there were too many goods, and according to basic laws of supply and demand, prices dropped. Falling prices led to lower wages and a domino effect occurred
across America. The presidents of the 1920’s let businesses take care of themselves and their excessive desire for profits led to depression. And it was bad. Very bad. There was around a 25% unemployment rate and 50% underemployment rate during the beginning of the Great Depression. Then Franklin Delano Roosevelt (FDR) came to America’s rescue. He started to employ Keynesian economics, which for him was deficit spending, to pump money into America. He put the unemployed to work, created social security and unemployment, paid farmers to produce less, improved America’s infrastructure, and much more. The “New Deal” as he called it, had an immediate effect on the American economy. It modernized society and brought electricity to almost every American (just as a side effect). Unemployment dropped 5% very quickly and America was recovering because the government was pumping money into the economy. The Depression finally ended after World War II, but government spending kept millions of people from starving and put them to work.
The period after World War II was one of the most prosperous in American History. Americans across the board were making more money than ever before and coincidentally, the progressive income tax for the wealthy was above 70%. America was the most prosperous ever during a time when the tax rate was almost double what it is today. America retained this prosperity, for the most part, during all of the democratic presidencies until Nixon. When Ronald Regan became president, the economy was in the midst of a recession. His solution was “Reganomics” one of the basic republican economic policies of today. He cut taxes, lowered regulation of the economy, and cut federal spending. The result: more recession and one of the highest American poverty rates ever, just behind the Great Depression. Reganomics kept the country in recession and only made the rich richer while the poor became poorer. So how did America ever recover from this recession? – Military Keynesianism. President Regan spend so much money on the military, that the national debt increased even more, and jobs were created, ending the recession. Regan called it something else, but it was just Keynesianism in disguise. Economic growth across the board rose. The effect was similar to that of the New Deal, but not as widespread. The principle remains that conservative economic policy of Reganomics only widened the gap between the rich and poor and worsened America’s recession. Keynesian came to the rescue once again.
So we have seen throughout history that conservative, pro business economic policy has resulted in the depressions 
and recessions of America. No one can deny the facts and figures. Conservatives will try to argue that Keynesianism eliminated market freedom and will lead to socialism, but there is a reason why most economists in academia are Liberal. Keynesianism has been the answer every time that we successfully conquered our economic downturn; this is exactly why President Obama has employed such a model. He is spending government money to jump-start the economy. This current recession will go down in history as being solved by government spending, just like all of the other ones.
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My research came primarily from these two textbooks:
Nation of Nations. 6th edition. Davidson, DeLay, Heyrman, Lytle, Stoff
American Government, Ninth Edition by: James Q. Wilson, John J. DiIulio, Jr.
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Well the present state of our economy has been really bad lately. I’ve been trying to land a job for months now. I have a masters degree in computer scienece but can’t get a job! Bah!!! Help us Barack
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Great post about this. I’m surprised to see someone so educated in the matter.
You are an idiot. This was the most stupid analysis I have ever read. The Gilded Age was the strongest period of growth in American History. Wages grew at a rapid rate and America went from a third world nation to the biggest economy in the world by 1870. The Great Depression was actually extended by the new deal. Herbert Hoover was the one who raised income taxes from 25% to 63%. Businesses could not afford to hire, and had no incentive to hire. This is why unemployment remained high. You simply say that “mulitary keynesianism” was to thank for Reagan’s boom. However, you ignore that all the keynesians said that his policies would lead to inflation, they actually ended it. Also, Keynesian economics is based on demand. And, under Reagan, the growth of nominal demand fell. This dissproves the false notion that Reagan’s expansion was keynesian. It was actually completely based on the tax cuts, deregulation, and monetary policies of Reagan. I guess some simple facts can disprove any liberal idea.
To Mr. Brown:
I am not disputing that there was rapid growth during the Gilded Age, that is history, but the lack of regulation and monetarist policy also caused the WORST depression in history other than the Great Depression. If you think that it is worth it for the entire country to suffer economically, then I won’t try to change your opinion.
The Great Depression was in NO way extended by the New Deal. Unemployment started to immediately drop once the deal was put into action. Think about it, people were put to work fixing highways, creating art, and a variety of other things. Naturally unemployment would go down if more people are working and these people can spend more money. This causes businesses to hire more people, creating a cycle the improves the economy. And when FDR decided to put a temporary halt on the New Deal, unemployment spiked, only to be lowered again by Keynesianism.
You say that “Herbert Hoover was the one who raised income taxes from 25% to 63%” but this is blatantly wrong. America has a progressive tax system, so only those at the very top of the bracket, let’s say 1% of people actually paid a 63% tax. (I got this from a conservative think tank to save you the trouble) And then there are all of the loopholes… I know that we will differ on ideology about this, but regardless, you failed to say that only the richest of the rich would pay this high of a tax, and they can surely afford it.
Now for businesses, again you are making an over-generalization. The tax on businesses went up from 12% to 13.75% a whole whopping 1.75%! ( I hope you didn’t miss my sarcasm) Your theory that businesses could not afford to hire holds no ground anymore and never did. Businesses could not hire because people were not spending money, not because of some trivial tax increase. Your argument that higher income taxes caused the great depression is also void.
Conservative economic policy has shown time and time again that it increases unemployment, which in turn hurts the overall economy. According to Paul Krugman, “like Reaganomics — but more quickly — Bushonomics has ended in grief. The public mood today is as grim as it was in 1992. Wages are lagging behind inflation. Employment growth in the Bush years has been pathetic compared with job creation in the Clinton era” This is just something that I read in the Times yesterday, but the facts are the same no matter where you get them. Keynesianism has shown time and time again to be the best approach to the economy.
I will respond to the specifics on Reagan once I have the time to do more research.
and my sources if you want to see the facts for yourself:
http://www.nytimes.com/2010/12/01/business/economy/01leonhardt.html?_r=1&ref=economy
http://www.cato.org/pubs/pas/pa-192.html
http://krugman.blogs.nytimes.com/2008/01/20/reaganomics/
http://www.nytimes.com/2008/01/21/opinion/21krugman.html
To Mr. Soluk,
Paul Krugman holds no place to be cited. He is an extreme partisan who has been wrong about nearly every prediciton he has made. The Gilded Age did see uncertainty, but every crash that occurred orginated from bad government monetary policy. This is fact. In 1837, the national bank was printing too many paper notes and Jackson outlawed credit for public lands, these caused a depression. But, overall growth was much stronger in the 1800s than the 1900s. We also saw much more innovation. Indeed, regulations and high taxes are holding back many potential entrepeuners. I know that the 63% tax only applied to the top, but many businesses are at the top. The new rate kept these wealthy from investing in jobs. Uncertainty from the New Deal also prolonged the depression. The 1937 crash had nothing to do with a pullback in spending. It had more to do with new taxes, like the excess profits tax. The idea that cutting spending hurts the economy has been debunked. In reality, Roosevelt neverr really cut back on spending, he only raised taxes. As I said, if Reagan’s success had to do with demand side economics, inflation and demand would have risen, but they fell. Paul Krugman, in the 1980s, said there would be a “inflation time bomb”. As usual, he was dead wrong. Recently, Bush’s 2003 tax cuts led to an immediate drop in unemployment. Reagan also saw a major rise in wages and decrease in unemployment (16.1 million jobs created).
Finally, I have one last question. Keynesian economics was tried in 2009 with the stimulus package. Yet, unemployment continued to rise and it is stll rising. If government spending was the way to prosperity, we wouldve seen alot more job growth by now.
The reason that keynesianism has never worked is simple. The government can’t create wealth. It can only take wealth from the private sector. To pay for that spending it can either: A.) Raise Taxes, which hurts the economy much more B.) Borrow from Credit Markets which siphons off private investment C.) Borrow from Foreign sources, however the foreign lenders have to get AMerican Dollars so the balance of trade adjusts itself to this D.) Printing Money, which causes inflation. Therefore, government can’t and never has spent its way to prosperity.
To Mr Brown:
First off, Paul Krugman has every right to be cited. He won a Nobel prize in economics, which alone makes him credible. He also taught at MIT, Stanford, and Yale to name a few schools, so he definitely knows what he is talking about. As for him being wrong about everything, I have only been alive for 18 years, and I only started to care about politics and economics about 3 years ago. The way I look at it, is that there has to be some reason why he is still as famous as he is and still talked about all these years later. If he failed as much as you claim, then no one would respect him anymore and he certainly would not be teaching or winning Nobel prizes.
As for the Panic of 1837, I did not write about it in my article, nor is it part of the gilded age, but there are some flaws in your analysis of the issue. First off, Martin Van Buren, who was president right after Jackson and during the panic used very little, if any government intervention in the economy, resulting in a 5 year depression. He let the economy run by itself as monetarists would like, and America sat in depression for 5 years. The banks were also at fault for making money so easily available. If they are just giving out money to people, there will be trouble. People were speculating who should not have been approved for loans in the first place. Just like this recent recession, the banks made it soooo easy for someone to borrow money, that people bought houses or land who could not afford them. Some did not even have a job, but the banks gave them money, because they were betting against their customers anyway (more recently). These people could not pay back their loans and when the numbers began piling up, the banks were in trouble. If there was more financial regulation, then this situation could have been avoided as banks would not have been trying to make more money through shady dealings. Ergo, a lack of government financial regulation actually caused the depression in the 1840’s and the current recession.
I understand that businesses earn a great deal of money, but the tax on businesses that you are referring to went up from 12% to 13.75%. This trivial increase will not cause a depression.
So I have a problem with Conservative economic policy in general. It just assumes that the rich will spend their money and that this money will create jobs and trickle down. But here is my problem: If you are rich and already own a Mercedes, are you going to buy another one just because you can? — I think not. Are you going to buy another Yacht, especially during economic uncertainty? — No. I respect your right to buy a Mercedes or a Yacht, but when you already own one and the economy turns south, like all other people the rich instinctually want to save their money in case they need it to buy food or other necessities in the future. This is just a natural human reaction and I highly doubt that a rich person is willing to gamble a Yacht over feeding his family a year from now when no one knows what will happen. So giving these few people more money during recession or depression is just bewildering. (That is also my subtle attack on the Bush tax cuts)
Because we have seen, as with Martin Van Buren, what happens when the government does not intervene in the economy (5 year depression), I think it is safe to say that the Great Depression was not prolonged by the New Deal. Under Van Buren, government did not act and America was depressed. In the late 1800’s, government intervened very little and there was depression. As history shows, depression happens when government does not step in to help solve the problem.
Finally, before I get to Keynesian theory, I do not know where you got your information that Bush’s tax cuts led to an immediate drop in unemployment. I read an article in the Times (yes I know its a liberal paper, but the facts are the same no matter where you get them) that stated after “President George W. Bush signed the cuts in 2001, the economy lost jobs for the next two years, and economic growth during his presidency was mediocre.” If you can share where you got your numbers from, I would like to know so that I can form a more complete opinion of the issue.
http://www.nytimes.com/2010/12/01/business/economy/01leonhardt.html?_r=2&ref=economy
Now, in 2009 Keynesian economics was implemented with the stimulus and the economy has in fact started growing. The stock market is around 11,400 right now, not too far from where we were before the crash. Additionally, unemployment is falling as well, at least if you trust the U.S. Bureau of Labor Statistics. Or you can look at this cool chart http://www.google.com/publicdata?ds=usunemployment&met=unemployment_rate&tdim=true&dl=en&hl=en&q=american+unemployment+rates
It took a little while for the stimulus to kick in, but since January, it has been working. So in fact, the economy is growing and creating jobs. The auto companies that the government lent a lot of money to are paying it all back because they are starting to bring in profits. Like everything else, it just takes time and patience to heal the wounds.
Your final argument is all based on economic theory. I unfortunately have not yet even taken an Economics class, so I do not have the knowledge to refute your specific claims. However, I have presented throughout this post and responses the cold, hard, historical facts of what happened with the economy. I am looking at the before and the after of Keynesian economics and seeing success. Whether or not what you said in your comment about the nature of Keynesianism is true does not matter because the final result of Keynesian economics is prosperity for America.
I have also only used facts. It is fact that the 1837 crash, just like every other major crash, was caused by bad government monetary policies. Martin Van Buren did exactly what he should have done to help the economy recover, nothing. And we grew out of what should have been a longer depression relatively quickly. Downturns are a natural part of the free market, but the largest ones are caused by bad government policy. The New Deal did extend the Great Depression, this is fact not opinion. It is also fact that keynesian economics have failed every time they have been tried. They prolonged the New Deal in the 1930s, failed to help the economy in the 1970s, and how about the fact that unemployment is still rising. Finally, what happened in Japan in the 1990s, there was a lost decade this was because of Keynesian economics failed as usual, they had billions of stimulus.
Finally, the Bush tax cuts did not take effect until 2003, that is when unemployment started following, this is another fact. Wow, I guess facts prove liberal ideas wrong… who knew?
The depression of 1837 and all other depressions were created by people being greedy, caused by a lack of proper regulation. The reason why Brazil is not in recession right now but is actually booming is because of regulation on the banks that kept them away from subprime mortgages and the other factors that brought the U.S. down. I realize that we will differ in opinion about this, but so be it.
Here are the facts about the New Deal. In 1932 GDP was 584.3 million. In 1937 GDP was 831.5 million. In 1942 GDP was 1308.9 million. GDP constantly grew in America under the New Deal, so there is no way that anyone can say the New Deal extended the Great Depression. The numbers do not lie. Finally, unemployment was also 25% when FDR took office, by the time he finished it was 15%.
Current unemployment rates have been on a steady decline since the peak last year because the stimulus kicked in. It was 10.6% then and is 9.3% now, according to the U.S. Bureau of Labor.
Finally, there were 2 bush tax cuts one in 2001 and one in 2003. The quote refers to the one in 2001, which “Bush administration’s own Economic Advisement Council” opposed. Unemployment increased after this tax cut and never fell back to Pre-Bush levels.
That was wrong on so many levels. Again, scholars agree that the New Deal extended the Great Depression. And, unemployment is rising right now. It is at 9.8%, up from 9.6% last month. The 2001 tax cuts were keynesian, so they should have worked. The 2003 tax cuts were supply side and they created an economic boom. Those are the facts…
Can’t believe how twisted this article is. FDR came to America’s rescue–you conveniently ignore the fact that the only significant event regardless of Keynesian economic policies pursued by FDR, the ONLY thing that brought down unemployment was WWII. Look at the unemployment graph on Wikipedia or any encyclopedia, unemployment was on it’s way back UP before the war started:
http://en.wikipedia.org/wiki/File:US_Unemployment_1890-2008.gif
Truly, Keynesian economics in it’s current form, combined with a disasterous Federal Reserve monetary policy, has only contributed to an endless boom-bust cycle. If the latest housing market is not proof enough of how Keynesian economic policy has screwed up the economy and brough the markets out of equilibrium then there is certainly no reasoning with you. I hate partisan sites like this that twist and skew facts into outright untruths. Keynesian economics, combined with the greatest ponzi scheme man has ever devised (fractional reserve banking) and a Federal Reserve (aka lender of every resort) have errected a shaky economic reverse pyramid completely based on illusions and false prosperity rather than rooted in sound economic principles and it started to unravel in 2008 and could come toppling down at any given crisis.
Moral hazard and government bailouts is at the very heart of this latest economic crisis and the bankers and elite driving our country into the ground via the biggest transfer of wealth history has ever known. If I go gambling in Vegas, i loose my shirt but if the bankers gamble in the markets, they have a golden parachute at the expense of the taxpayer because they are too big to fail. Look at how China handles banks that get out of control with the Guangdong International Trust and Investment Corporation–they told them to go pound sand when they bet in the markets. The NY times reported that “By refusing to bail out Gitic, China is signaling that investors will be held accountable for their lending. Gone are the days when foreign bankers could rely on political connections as a substitute for proper credit-risk analysis.”
You all are a bunch of idiots, pawns of the system and a clever game of politics designed to divide America and paralyze any impetus among the people while the banks and corporations rob us in broad daylight. $9.7 trillion and counting is what this latest crisis cost us and if you think Obama came to Washington to bring any kind if change you are just a silly fanboy stooge like the rest of his acolytes.
Wall Street was Obama’s biggest financial support base in 2008, he never forgot it and people like you will never learn.
Well, Andrew, perhaps it is the common first name but I find your analysis highly credible. You relay facts and empirical evidence and quote Nobel Prize winning economists. John Brown, like most conservatives in this area, simply makes it up as he goes along – it’s a Fox News tactic to just scream loud enough and long enough and make up history and people will start to believe you. And clearly you did some research on the topic, so starting an argument by calling the other person an idiot is both uncivil and unAmerican and says more about the type of person John Brown is than what you are saying.
Because it is a complex topic, the average person is often confused by it. But, in reality, it is not confusing.
Keynesianism, in its essence, states that you increase government spending during a recession and encourages running a surplus during a strong economy. Monetarism brings into account the ability of monetary policy to sometimes provide more stimulus quickly to the economy as well as the need to keep an eye on money supply measures to avoid high rates of inflation.
In the 1930s, Keynesianism was essentially used to bring the economy back somewhat, but then conservative forces started having their way and there was a retrenchment. Only when WWII forced a military version of Keynesianism did the country rebound fully.
Keynesianism was the basic fiscal policy approach for the US economy through 1980. Reagan never really got away from it, but what he did was run up the most massive deficits in history during the 1980s with military spending and tax cuts that did not help the general economy, but helped billionaires purchase more Rolls Royces. Reagan failed to run a balanced budget once the economy recovered and it was not due to Congress – Reagan’s budgets were always the same or higher than Congresses. Enter Bush 1, who was a more reasonable person and understood just how much ‘voodoo’ was in this economic approach, and he was stuck with Reagan’s economics and, to his credit, tried to raise some tax revenue and was repudiated. Enter Clinton and he actually helped put the economy on solid footing and actually ran surpluses during the last three years of his administration – something no Republican has done. During prosperous times, this is what Keynesianism suggests.
Enter the Bush 2 gang and massive tax cuts to buy even more Rolls Royces, massive deficits for overseas adventurism, and the largest deficit spending in history – at exactly the time we should have had either balanced budgets or surpluses due to the strong state of the economy until late in his term. Bush 2 and Reagan’s spending account for almost all of the deficit spending in history.
Enter Obama. He is stuck with a serious recession and the only thing that will alleviate it is government spending. Unfortunately, we have massive debt thanks to military spending (over half of the world’s military spending) and Bush 2′s irresponsibility. The cynical right wingers use this as an opportunity to start crying – hypocritcally – about government spending being out of control. They know that if that spending is reduced it will ruin the economy and, thereby, improve their election chances. They also know that will drive wages down even further and widen the gap between rich and poor even further. When you are a disciple of Ayn Rand and focus on how great it is to be self-centered, that is what you want to do.
Keep up the good work Andrew. We have a lot of fools who have been duped by the likes of John Brown to educate to try to save the US.
This “Proof that Keynesian Economics Works” is a joke. Nothing like a bunch of dimwitted liberals desperately trying to find talking points to support their moronic president and “his” economic theories. Sadly, Professor Obama never took economics and has no idea how it works. Or wait, maybe he did. But we will never know since he is hiding all of his college transcripts, his enrollment, his letters written at the Harvard Law Review, etc.
Anyway, to my dimwit commentors who believe they have found liberal/progressive nirvana in this poetic piece on Keynes’ economic theory, perhaps you could put your thinking caps on and see the bias in this hit piece on Capitalism that we have been using since our country’s founding. Seems like it has raised the standard of living for everyone in this country and around the world.
Proof that Keynesian Eco doesn’t work is the EU. Look at how the EU is on fire today, with austerity measures that make the EU look like the most conservative entity in the world. I guess if Keynes Eco worked, I guess that the EU wouldn’t be bailing each other out, and the US bailing them out, and so forth and so on.
Think for yourself and ask tough questions!
Dear, the obviously too young to really know how the world works,
Just like you, everyone was born with a family that tried to mold there child in the same beliefs and ideals as them, for the sake of the country and the people. Your statements above demonstrate your strong backing of the democratic party; however, they also demonstrate a problem that persists on both sides of the fence…the lack of independent and lucid thought on today’s issues. Everyone lets the media tell us whats going on and the finger pointing does nothing to solve the problems. When will people wake up and realize that both the Dems and the Republicans are stealing from us, the hard working middle class, and our childrens’ futures. Is is too difficult to comprehend that when the Fed prints money out of thin air to pay for war and entitlement both domestic and international, they actually drive inflation higher than they are willing to admit or report with their phony inflation statistic, CPI? Now that another year has passed since you wrote this, is it possible for you to look back at it and find your bias, given that we now know that the recession is most definitely not over and we are not back on track. Is it possible that people will finally see that the only politician that can help the country, and the world, is Ron Paul? Look at what we did to Libya and Gaddafi, even though Syria is much more of a problem we aided the removal of Gaddafi simply because he wanted an international gold standard and now we are after IRan because they supported Gaddafi in these efforts!!! Not only are we the people of the US being screwed by the intense inflation that is now and will continue to persist but the people of the world are being screwed by it as well everytime they have to accept phony paper dollars for their tangible goods since the dollar remains the world’s reserve currency. We all need to start thinking for ourselves and stop letting the media think for us, maybe then we will have the change the american people want rather than the change the american media and political parties want… And please ask yourself, who is more efficient at spending dollars, the private citizens or our bulky and corrupt government? Stop supporting dependency and start fighting for what you deserve, small and unobtrusive government that follows the constitution. Yes it is possible!!!
Nick
One year later I can tell you that I’m still a fan of Keynesianism. Our economy is finally putting up some serious growth! Joblessness is down to 8.5%, I’d say we are on our way to recovery, “obtrusive government” and all!