"Lord Keynes Would Be Proud Of Bush/Obama Deficit Spending"

John Maynard Keynes (right) and Harry Dexter White at the Bretton Woods Conference

John Maynard Keynes, 1st Baron Keynes CB (pronounced /ˈkeɪnz/ "cains") (June 5, 1883 – April 21, 1946) was a British economist whose ideas, called Keynesian economics, had a major impact on modern economic and political theory as well as on many governments' fiscal policies. He advocated interventionist government policy, by which the government would use fiscal and monetary measures to mitigate the adverse effects of economic recessions, depressions and booms. He is one of the fathers of modern theoretical macroeconomics and considered by some to be the most influential economist of the 20th century.

In the wake of the Financial crisis of 2007-2008 the free market consensus began to attract negative comments even by main stream opinion formers from the economic right. In March, free market guru Martin Wolf, chief economics commentator at the Financial Times, announced the death of the dream of global free-market capitalism, and quoted Josef Ackermann, chief executive of Deutsche Bank, as saying "I no longer believe in the market's self-healing power."  Shortly afterward influential Economist Robert Shiller began advocating robust government intervention to tackle the financial crises, specifically citing Keynes. A series of major bail outs followed starting on September 7th with the announcement that the U.S. government was to nationalize the two firms which oversaw most of the U.S. subprime mortgage market - Fannie Mae and Freddie Mac. In October, the British Chancellor of the Exchequer referred to Keynes as he announced plans for substantial fiscal stimulus to head off the worst effects of recession, in accordance with Keynesian economic thought. Similar policies have been announced in other European countries, by the U.S., and by China.

Wars. Bailouts. Unemployment aid. Automakers. Washington has opened the tap on big spending and money is gushing down the pipeline.

The national debt now stands at $10.6 trillion, compared to about $5.7 trillion in 2000 before George W. Bush took office. Buckle up, because that figure is going to climb.

Here's where some of the big bucks are going:

_Iraq war. Various estimates put the total cost of the military operation since 2003 at about $600 billion.

_Bailout. The Troubled Assets Relief Program (TARP) signed on Oct. 3 provides $700 billion in financial relief. Of that amount, the Treasury Department has committed about $270 billion in cash injections for banks and another $40 billion for the insurance company American International Group.

_Economic stimulus. Last February President George W. Bush signed into law a $168 billion stimulus package that included rebates for households and tax breaks for businesses. President-elect Barack Obama is preparing another stimulus plan, and Democratic lawmakers say they expect the package that will be considered by Congress in January could total between $500 billion and $700 billion. That figure will include Democrats' tax cuts, aid to states and new spending on health care, clean energy and public works.

_Detroit. General Motors Corp., Ford Motor Co. and Chrysler LLC and their suppliers have been authorized $25 billion by Congress to retool their assembly lines for making more fuel-efficient cars. Now, the Big Three automakers want an additional $25 billion in cash infusions from Washington to ensure they will have the funds to operate through next spring. Congress could act on it in December.

_Housing. Bush in late July signed a housing bill including $300 billion in new loan authority for the government to guarantee cheaper mortgages for troubled homeowners. In addition, the Treasury in September took over mortgage giants Fannie Mae and Freddie Mac, pledging up to $200 billion to back their assets.

_Jobless aid. As its last act before recessing last week, Congress approved an extension of up to three months for expiring unemployment benefits. The cost to the government is almost $6 billion.

_Federal Reserve. In the past year the Fed has increased its lending and purchases of debt by $900 billion, to almost $2.2 trillion.

_The federal deficit — the difference between what the government received from taxes and other revenues and what it spent — in the 2008 fiscal year that ended Sept. 30 was $455 billion. That compared to $161.5 billion in 2007. Just one month into fiscal 2009, the budget deficit had already reached $232 billion, including $115 billion going directly on the deficit ledger for bank stock purchases last month as part of the financial system bailout. The Congressional Budget Office counts the bailout cost so far at $17 billion, which represents the "present value" of the money. The deficit for fiscal 2009 could climb closer to $1 trillion.

Deficit spending is the amount by which a government, private company, or individual's spending exceeds income over a particular period of time, also called simply "deficit," or "budget deficit," the opposite of budget surplus.

When the expenditures of a government (its purchases of goods and services, plus its transfers (grants) to individuals and corporations) are greater than its tax revenues, it creates a deficit in the government budget; such a deficit is known as deficit spending. This therefore causes the government to borrow capital from the 'world market', increasing further debt, debt service (interest) and interest rates.

The opposite of a budget deficit is a budget surplus; in this case, tax revenues exceed government purchases and transfer payments.

Following John Maynard Keynes, many economists recommend deficit spending in order to moderate or end a recession, especially a severe one. When the economy has high unemployment, an increase in government purchases creates a market for business output, creating income and encouraging increases in consumer spending, which creates further increases in the demand for business output. (This is the multiplier effect). This raises the real gross domestic product (GDP) and the employment of labor, all else constant lowering the unemployment rate. (The connection between demand for GDP and unemployment is called Okun's Law.) Cutting personal taxes and/or raising transfer payments can have similar expansionary effects, though most economists would say that such policies have weaker effects. Which method has a better stimulative economic effect is a matter of debate.

There is, however, a danger that deficit spending may create inflation -- or encourage existing inflation to persist. (In the United States, this is seen most clearly when Vietnam-war era deficits encouraged inflation.) This is especially true at low unemployment rates (say, below 4% unemployment in the U.S.). But government deficits are not the only cause of inflation: it can arise due to such supply-side shocks as the "oil crises" of the 1970s and inflation left over from the past (inflationary expectations and the price/wage spiral). If equilibrium is located on the classical range of the supply graph, an increase in government spending will lead to inflation without affecting unemployment. There must also be enough money circulating in the system to allow inflation to persist -- so that inflation depends on monetary policy.

Whether government deficits are good or bad cannot be decided without examining the specifics. Just as with borrowing by individuals or businesses, it can be good or bad. If the government borrows (runs a deficit) to deal with a severe recession (or depression), to help self-defense, or spends on public investment (in infrastructure, education, basic research, or public health), the vast majority of economists would agree that the deficit is bearable, beneficial, and even necessary. If, on the other hand, the deficit finances wasteful expenditure or current consumption, most would recommend tax hikes, transfer cuts, and/or cuts in government purchases to balance the budget.

   The influential British economist, John Maynard Keynes, would be very proud of the Bush trillion dollar deficit spending and the projected Obama trillion dollar deficit spending, as Lord Keynes  taught that massive government deficit spending (spending what the government doesn't have) is good for an economy in recession or depression. The "New Deal" economic policies of President Franklin D. Roosevelt was influenced by the Keynesian philosophy of deficit spending. The part I don't like about massive government deficit spending is that the government has to borrow from foreign governments and banks to meet it's financial obligations, usually through the sale of Treasury Bonds, which is why countries like China, Saudi Arabia and various European countries practically own our nation now. As I see it, all massive deficit spending does is create one or two economic "bubbles" that burst in a relatively short time while putting our nation deeper and deeper in debt to foreign governments and banks, perpetuating a never ending "debt based" economy. Infrastructure spending, adopting a non-interventionist foreign policy (ending all wars and foreign monetary aid), not raising personal income taxes while judiciously cutting taxes for certain businesses and industries and placing tariffs and quotas on all imports (abandoning free trade agreements) will turn our economy around and begin to bring the deficit down, as I see it. To hell with Lord Keynes's massive deficit spending philosophy that leads to a bank controlled debt based US economy.

tags: john maynard keynes  deficit spending  bush  barack obama  politics  business  capitalism  us  takebackamerica  

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