To Spend or Not to Spend....

Very simply, but quite appropriately in the context, Keynesian economics can be described as the rejection of the neoclassical idea that employment and business cycles could be left entirely to the invisible hand coupled with the adoption of the concept that timely government spending and monetary policy could ease economies through the more extreme fluctuations that would naturally occur in their absence. Such notions heavily influenced economic policy in most of the capitalist powers from around the time of Keynes' death in the mid-1940's until the 70's, when economists (particularly those of the Milton Friedman led Chicago School) began to reject the idea that governments had the ability to control business cycles to the extent Keynes had advocated for.

Despite a period of dormancy, Keynesian economics is once again very much in vogue, at least among decision makers in Washington. This is not surprising as Chief Recession Buster and Fed Chair Ben Bernanke, an astute student of the Great Depression, is well-versed in Keynesian policies. Indeed, the seeds of many of Keynes' hypotheses were planted in certain failed economic policies of the Roosevelt administration including spending cuts that, in retrospect, are viewed as having prolonged the pain of the time. Keynesian notions that government spending can be an effective tool in battling recession also have a natural and captive audience in the party controlling both the White House and the Congress currently. Finally, many of the oft-cited and 'popular' economists of today, including Krugman, Stiglitz and Mankiw, have advocated for Keynesian policies in the past.


However, in the nation of his birth, as well as in other continental nations, Keynesian economics has been roundly rejected by governments who hope to control spending rather than use it as a tool for growth. This phenomenom has been occuring in nations such as Greece, Spain and France where austerity measures have faced some resistence from the public, and also in places such as Great Britain, where the public has been, at least so far, more accepting of the idea that things might get a little worse before they get better. The difference is not surprising as the socialistic backlash of the continental states is largely absent in Britain after voters came out for the Conservatives earlier this year. Measures have included raising retirement/pension eligibility ages and across the board governmental spending cuts.

It is currently impossible to know who is right, and it is unlikely that anything but time will make this picture clearer. However, it does stand to reason that being responsible with finances will pay future dividends for the countries who are cutting back. Before those dividends, however, jobless rates will undoubtedly increase at the same time as some of those most in need face cuts to the programs they depend on. In the case of the US, while it is certainly possible that government spending could ease the nation through a downturn, it is also true that any possible positives are just as likely to be countered by unsustainable budget and trade deficits, future tax increases, rampant inflation, an unmanageable currency situation and reduced corporate spending. Despite the best intentions of all of the governments involved, it appears that Scylla and Charybdis might unfortunately have a say in this story before it reaches a happy conclusion.