IS STIMULUS THE ANSWER?

John Maynard Keynes in the 1930s offered the world a road to recovery during the Great Depression. That road followed the national accounting framework developed by his Russian contemporary, Simon Kuznets. Kuznets gave us the formula for the Gross National Product, now the Gross Domestic Product, or GDP. The relatively simple formula is: Personal Consumption (C) + Gross Investment (Ig) + Government Spending (G) + Net Exports (Exports – Imports, or X -M) = GDP. More simply put: GDP = C + Ig + G + (X – M), which also equals Aggregate Demand (AD). Since economic growth is growth in GDP, then all that must happen is to foster growth in the economy is to foster growth of one or more of the GDP components, which causes an increase in AD. According to Keynes, all economic cycles result from changes in AD, and it is AD that must be fixed, which is why we call Keynesian economics “demand management” economics. Keynes suggested tax cuts to foster growth in C and/or Ig, but he saw very little influence over either. Since Keynes was not concerned with monetary policy, which controls interest rates and the price of the American dollar, he had little control over net exports. But he knew that governments had absolute control over G and suggested that governments spend their way out of the Great Depression. Why not tax cuts to increase C and Ig? Tax rates were quite low during the 30’s and further cuts would not be very effective. Perhaps more important was that Keynes was a big government advocate and saw the depression as a great opportunity. So did current Progressives who did not want to see “a crisis go to waste” during our “Great Recession.”
Keynes believed that government spending is subject to a multiplier effect: each dollar spent by government will be spent and re-spent by recipients and have a multiple effect on the economy. Doesn’t happen. Taxpayers assume that higher taxes to pay for the extra spending are coming and cut back on consumption. Businesses cut back on investment because of uncertainty. Consumers will use the new government money to pay off past debt or salt it away.
Massive government spending during the Great Depression did little to create jobs. There were the PWA and WPA. The PWA completed significant projects including Grand Coulee (or is that Boulder?) Dam and the Overseas Highway to Key West. Good projects, but not permanent jobs. Workers of the WPA were busily digging a hole one day and filling it up the next. These were not permanent jobs. They were make-work. My father, who started a successful business during the Depression, said that WPA meant “We Piddle Around.” By the start of WWII, unemployment still stood at 15%. The depression finally ended when business was stimulated producing all those airplanes, tanks, ships, and guns necessary to fight the war. After the war, Rosie the riveter went home to the kids and kitchen, and the returning G.I.s took their places in factories making cars consumers needed and airplanes airlines needed.
Keynes called it “pump-priming.” Obama calls it “stimulus.” After the failed $787 billion stimulus, he wants more of it. It didn’t work in the 1930s and it won’t work now. Government creates work. The private sector creates jobs.