Posted by: ophelan | February 17, 2010

Arguments against Keynesian Theory

One of the conservatives I have been aruging with online linked me to this video done by the CF&P Foundation. While I was looking at some of their other videos I saw one titled “Keynesian Economics Is Wrong: Bigger Gov’t Is Not Stimulus”. I want to respond to the arguments he brings up, because some of them don’t make a lot of sense.

1: The Government can’t inject money into the economy without first taking it out.

This is true. However, that money that was previously only being used by the banks is given out to the people that need it in order to help businesses and employment. The point is that you will get more money back than what you put in. It is also about keeping the economy afloat. In order to do this, money has to get to the right places and the right people.

2: The money you put in is the same amount as the money you took out.

Yes, initially. However, the point of injecting the money into the economy strategically is that the money will increase and provide greater returns. A stimulus is basically about investing money in the economy. Like I said in my previous post, there are known returns on certain areas of investment. People are a worth while investment. The money will multiply. It is like saying the money you put into the stock market is the same amount you took out of your banking account. Technically true, but all investments start at whatever amount you decide. This argument doesn’t really make a whole lot of sense as it is impossible for this to ever be false, no matter how you are spending money.

3: The money doesn’t just ‘sit there’ when the government holds it, the banks are always borrowing and investing.

When the money is sitting in the Federal Reserve, it is being invested, true. However, borrowing and spending goes down during a recession. In a way, this argument doesn’t make sense. The way I see it, a stimulus is a way of investing money. It is just a more sensible investment during a recession. The money being left in the Fed isn’t being invested in our economy the same way stimulus money is. It won’t help spur small business, create jobs, or get consumers spending again.

4: Redistribution is pointless, the consumers will put it back in the banks anyway.

I would almost agree with this as it relates to tax cuts. I think that with such a small bonus as is provided with tax cuts, the consumer would be more likely to simply put that money into savings. However, the more savings a consumer has, the more likely they are to buy things. If they get a sense of security from their savings and it is enough for them to continue spending, then it was successful. Also, consumers aren’t investing in the central banking system. They are investing in private banks, which will then try to invest that money in the private sector. This is not as good as getting the money straight to businesses or development, but it is still better than the federal reserve holding onto this money. This is an invalid argument if we are talking about effecient redistribution via a stimulus. A lot of the money doesn’t just go straight to consumers directly. If a stimulus can provide jobs and/or job security, consumers are much more likely to spend money. Just like anything else, it can be done well, or it can be done poorly. Tax cuts are not about strategic distribution.

He uses exmaples of Keynesian theory in action that he says have failed in the past. For instance, he says that Hoover used a stimulus and gave the country a deficit, when he had taken the presidency during a surplus. Economic growth was down and unemployment was high. I don’t even think I have to go into the other examples as they were all pretty much the same. An expensive stimulus with unemployment remaining high. This is what a lot of people argue about with Obama’s stimulus plan now, and is the most frustrating for me. Yes, unemployment is high, our economic growth is down, and we are in debt. It is like some people don’t realize we are in a recession. These people seem to think the stimulus is what caused these things. All of his examples were of economies during a recession. He even mentions one instance where unemployment remained high. Well, thats almost the point. It didn’t get any worse, and the economy rebounded after the recession didn’t it? That’s the point of a stimulus. To save an economy before it hits absolute rock bottom. It is not surprising that when you take data from a recession, you are going to see high unemployment and low output.

He also fails to take into account the time it takes before you see a recovery, the size of the stimulus, and the recepients. It is well-known that the unemployment numbers always fall behind the economy. A stimulus isn’t going to just magically make a recession go away, but its going to help the economy to recover. In fact, when the stock market had unexpected growth months after the stimulus package, did anyone connect the dots? FOX News, who spend time almost everyday talking about the failure of the stimulus package, tried to tie it to Obama’s declining approval rating, saying that investors were getting more confident as Obama’s chances for re-election get worse.



  1. Excellent post. I’m experiencing many of these issues as well..

  2. You need only point the Roosevelt to give an example of how Keynesian economics worked. His stimulus plan brought the unemployment rated down from over 25% to 9% before the war.

    As for Hoover, it is well known that he didn’t put nearly enough into stimulating the economy and that’s why his efforts failed.

    Either we put money back into the economy and create jobs or we end up with massive unemployment and civil unrest. The only humane way to go is the way Obama and the Europeans have chosen to go.

    I can tell you are a thoughtful human-being. It’s great to read your words.

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