What Would Keynes Do?
John Maynard Keynes, 1883 – 1946, was the most influential economist of the 20th century. His ideas were adopted by Franklin D. Roosevelt to battle the Great Depression. Most economists, even many Republicans, credit Roosevelt and Keynesian economics with putting Americans back to work in the 1930s, helping the U. S. climb out of economic disaster, and setting the stage for the post-war economic boom. By 1971 President Richard Nixon admitted, “We’re all Keynesians now.”
Keynes theorized that during recessions, the public gets frightened and holds back on spending, resulting in more layoffs, which in turn produces less spending in a vicious circle of economic decline. The way to break the cycle, said Keynes, is to pump government spending into the economy by building roads and bridges and other public works. FDR even hired unemployed writers for a Federal Writers’ Project, traveling the country and producing guidebooks on the states and cities.
Keynes overturned classical economic theory which said that free markets produce full employment. Keynes argued that aggregate demand determines the level of economic activity. If demand falls short, it leads to recession and persistent levels of high unemployment. Keynes economics fell out of favor under President Reagan, but Republican President Bush brought back Keynes in the 2000s, ramping up spending in order to pump up aggregate demand.
So what would Keynes do now, in 2011? Let’s speculate.
1) Clearly, he would advise the federal government to invest in infrastructure, building roads and bridges, improving the electric grid, developing alternative energy, maybe reinvigorating the space program. Remember, it was FDR who built the alternative energy infrastructure of his day, from the Hoover Dam to the Tennessee Valley Authority.
2) Keynes proposed the concept of “price stickiness” — that workers quite understandably resist lowering their wages in the face of falling demand for labor. Keynes might well support Wisconsin Governor Scott Walker and others who are pressuring government workers to take wage cuts in response to lower economic conditions.
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