FBXL Social

In a joking way, you could consider Keynesian economics to be similar to "Don't worry, take meth when your marks are getting too low, and just stop taking meth when your marks are ok! That way you smooth out your marks without having problems!"

The point of Keynesian economics is to stabilize economic cycles by stimulating the economy when it is slow and then paying back the stimulus when times are good. This is the fundamental idea at the root of Keynesian economics.

Debt based spending by the government is an economic stimulant. According to economic models, one dollar spent by the government will result in many dollars of GDP as the money bounces around the economy. The idea then is that a small amount of deficit spending can cause a large amount of economic activity, and it increases GDP.

Meth is a neurological stimulant. A small amount of meth can make someone very energetic. It can be (and in some areas of the world such as Thailand regularly is) used to enhance concentration and energy so students can study more and get higher grades.

Meth is also very addictive. The feeling of being on meth is good.

Debt based spending is also very addictive. It lets you promise things to people without having to pay for them, which is politically great, and people like getting "free" stuff.

Meth feels terrible when you quit it. You get both physical and mental withdrawal symptoms.

Debt fueled spending also feels terrible when you quit it. Government programs shut down, taxes rise, and the same economic multiplier that helped stimulus work then works in reverse with multiple dollars taken out of GDP for every dollar taken out of circulation.

In my joke, I talk about doing meth just until your grades improve then quitting. Doing meth because your grades is bad is in my analogy similar to debt fueled stimulus during the bad economic times, in that it can help and feels good. Quitting meth afterwards is very likely not to happen however because once your marks have improved you keep using it thinking you'll get even higher marks, and quitting will feel really bad likely negatively affecting your grades, which leads to students who use such a strategy to addiction.

Compare with debt fueled government spending during hard economic times. The politicians enjoy spending the money, and when economic times turn they don't want to stop because they think they can get even better economic times and because it hurts to cut spending. Such a strategy has led to government debt addiction, such as the present 34 Trillion dollars in US debt.

The time period between the end of the great financial crisis and the covid recession was widely called the longest economic expansion on record. Despite this, the federal debt doubled because the government has been fully addicted since the 2001 dot com bubble burst recession.

Some people argue that we successfully used Keynesian economics after the world wars until Ronald Reagan came into power.

The postwar period isn't good for proving Keynesian economics work for a variety of reasons.

First, the postwar period in the US is one of the biggest economic booms in world history. It's easy to not fall into the pitfalls of economics which only really kick in during economic crashes during a period of economic expansion. I can "prove" that drinking cyanide helps cure covid if I never get covid and thus never drink cyanide.

Second, while the debt/GDP in America went down in the postwar period due to a growing economy because America was providing most stuff to most of the planet since most of the planet has been blown up, the nominal debt didn't go down after a short postwar demobilization period when a lot of capital assets and surplus equipment were sold off. This means that contrary to Keynesian economics the period of growth debt should be paid down, instead the debt stayed the same. The growing economy should have increased tax revenues (and did), and so extra revenue coming in should have funded budget surpluses which would have paid off debt from previous spending (but didn't)

I'm going to call the period starting with Reagan "Hyperkeynesianism", where government debt is massively increased to stimulate growth. This is a contrast to pre-Reagan Keynesian economics which may be considered as "real Keynesian economics" according to people who think the postwar period was evidence that Keynesian economics can work.

Third, consider the collapse of the Breton woods system to be evidence that while the nominal debt stayed the same, problems were occurring during the "real Keynesian economics" environment. Breton woods was a monetary system after world war 2 where the world moved off the gold standard, and instead agreed to use US dollars which were then convertible into gold. If everything was fine and the dollar was indeed "good as gold", then we would still be on this system today, but in the early 1970s, Nixon ended gold convertibility, ending the Breton woods system. To ensure the dollar didn't totally collapse, Nixon worked out a deal with Saudi Arabia, the most powerful oil producer in the world at the time, so they would work only in dollars. This meant that while the dollar might not be convertible into gold, it could be converted into black gold in Saudi Arabia. It shows that things were not great prior to that point, and America was already struggling.

Fourth, consider that the size of government compared to GDP essentially went up non-stop from the end of the postwar demobilization. This isn't what you'd expect if we saw Keynesianism implemented properly. You'd expect to see government rise and fall countering the real economy.

"But wait," you say, "I already said it's not real Keynesianism!" In fact, you're showing that real Keynesianism has never been tried!"

Well, indeed that might be the case, but my argument doesn't need something to be "real Keynesianism" for my argument to be true and correct. You see, I am analyzing Keynesian economics through the lens of economics.

Economics is at its heart, the study of incentives. Macroeconomics tend to try to describe the behavior of incentives in aggregate, looking at entire economics, and microeconomics tends to look at economic calculations made by individuals in individual situations. The two are often looked at separately, but they do in fact intersect. After all, macroeconomics is just the sum result of many microeconomic decisions.

So where you going to end up with a problem is if you have a macroeconomic model that requires someone to make microeconomic decisions they are not going to make because the microeconomic incentives are against making the right choice.

To understand what the incentive structures are, you don't need to listen to me, but listen to the various criticisms of democracy in Plato's Republic. In book 8, Plano explains how people become under democracy, and what happens. He explains how politicians will single out the rich for punishment for being rich, because the rich people are in the minority and you're trying to get a majority of votes. Very importantly, he describes the democratic man as someone who ends up running up massive debts, create mobs who live in fear of oligarchy, until led around by clever demagogues using that fear to lead the people into tyranny.

Throughout most of its history, the United States was intended to be a Republic, and parliamentary democracy was also supposed to be operating as a republic of sorts. Both phones government did have elements of democracy, but the raw corruptibility of democracy was supposed to be tempered by forces of aristocracy. In case of British parliamentary democracy that would be the house of lords and ultimately the king, and under American Democratic republicanism, be short lived democratically elected Congress would be tempered by a senate originally chosen by the governors of each state and the judiciary appointed for life. The idea would be that the land owning people who had a stake in the nation would have a say, and that say would be quite democratic with elections happening every 2 years, but would be tempered by a senate representing the interest of the individual states and representing merit.

So why does all of this matter? Well, over the last century or so many of the non-democratic elements of these republics have been minimized. What was originally votes by land owning heads of families ultimately ended up becoming universal suffrage, and what was originally people of merit selected by their states to represent the interest of their states became just another popularity contest except happening every 6 years instead of every 4. The concept of democracy took over the idea of the republic, and we got to see this in terms of the significantly lower levels of language used in debates for the office of president. Instead of trying to select the best man, at some point we started trying to select the most likable man. All of this means that we are constantly dealing with a popularity contest, and so decisions need to be made based on that popularity contest. You don't have a choice as to whether to be principled, because for virtually anyone who could put a damper on a decision to spend more money, or to take a second look at a decision to make spending cuts, everyone is worried about their next election.

Keynesian economics is untenable in a democratic system because during the hard times you end up giving something to people that in the good times you end up taking away. Politicians who wish to survive therefore will simply be voted out of office for someone who does promise to just keep on spending, and since everyone gets a vote not just the people who have a stake in the success of the country by virtue of leading households and owning land, the prophecy Plato expressed has occurred, with Keynesian economics as the masthead.

Now you might say that the system has been corrupted, but it is designed to be corrupted by virtue of what you're asking politicians to do. You create massive constituencies of people getting money directly from the state, and those people are quite happy to be getting money, and then during the good times you are expected to erase those massive constituencies of people, and those people vote and they also donate to political parties, and their bosses also donate to political parties. Of course people who become powerful during downturns by accepting government money are not going to give up their government money without a fight, and in bad enough downturn the constituency of people getting free money from the government is of course going to become a powerful lobby. Particularly in close races, such a constituency will be the difference between winning and losing, and thus everyone is incentivized to spend in the bad times and continue spending in the good times, which is one reason why the government went from 10% of GDP at the turn of the 20th century to at times over 50% of GDP in the last few years.