Keynesian Economics 101


Courtesy of Flickr User Keith Ramsey

Ask most people why the United States is on the brink of default and the answer will be surprisingly simple: this May, we run the risk of hitting the debt ceiling. This is wrong. The reason the United States might default is because we refuse to realize that government spending is a good thing, and for some reason, Congress will try to limit it. This is also wrong.

Paul Krugman went on Joe Scarborough’s program Monday to bang the drum of Keynesianism. It didn’t go as well as plan for the Nobel Laureate. He faced notable opposition from conservate President of the Council on Foreign Relations Richard Haass, Democrat-but-really-a-Republican Ed Rendell (sorry, Penn) and conservative Joe Scarborough. Mika Brzezinski is a Democrat, but did Krugman no favors here.

Krugman’s argument was that, at this point in a modest recovery, it makes little sense to cut spending when we need to continue stimulus. Rendell was unclear, but seemed to think that we could do a little bit of stimulus, but only if it were paired with austerity. Haass and Scarborough came from different ideological standpoints, but both agreed spending cuts were the way to go, especially when it comes to entitlements. Finally, Btzezinski seemed confused, but she was closest to Rendell’s argument.

Who was right?

Well what I just asked was, “Was the Nobel Laureate in economics right about economics?” The fact that we were even questioning Krugman on such a fundamental level is, to me, asinine. But the response from Scarborough makes little to no sense. He says that his economics is right without citing any formal economic analysis; he merely says, essentially, that because a bunch of different ideologies agree with him, he’s right. That’s not how the scientific method works. A conservative and I could agree that the solar system is geocentric, but Galileo preemptively proved us wrong. Similarly, Rendell and Scarborough can agree that spending cuts are good right now, but John Maynard Keynes proved them wrong decades ago.

Let’s tackle this by the argument from logic first. Gross domestic product is a function of consumption, net exports, investment spending, and government spending. Therefore, it follows that if we decrease government spending, holding all other things equal, GDP goes down. The argument from logic can’t really control for the other three variables given a change in the fourth, but with all things equal, it’s easy to see how GDP decreases.

The argument from economics isn’t much different. Consumer spending has been pretty constant since the technical end of the recession, and investment spending and net exports have been the same. Given that background, it’s hard to say that decreasing government spending, a lot of which helps to fuel consumption or is an investment, is hard to accept.

The big thing here though, is budgets and deficits: why is there a huge emphasis on cutting the budget deficit and cutting the national debt? What would happen to the United States if we kept running deficits and debts for the next, say, 15 years? Anything? The United States may not be cranking out high growth rates like we did in the 1990s but at least we’re growing positively, which is something most Europe can’t say. With the United States as the main purchaser of Chinese goods, it’s hard to make the argument that China would try to harm the American economy. So then what happens?

Instead of putting the government in the unnecessary position of default (which should never happen to a country with its own currency and a printer), Congress should accept the fact that there is literally no short-term downside to debt whatsoever. Embrace the debt, embrace deficit spending, and we can grow our way out of any long-term debt problems. Take care of it now, and, most likely, prolong the recession.

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