Keynesian Economics: Valid Principles or Re-Election Tactics?

Hoover doesn’t look pleased, but when you’re blamed for the Great Depression, why would you be? Image courtesy of the US Library of Congress

Political Expediency of Keynes-Style Economic Policy

Regardless of whether the truth is on one side, the other, or somewhere in between, it seems clear that most governments have embraced Keynesian economics. It may well be due to one major political benefit: expediency.

When George H.W. Bush struggled with the sharp 1990-92 recession, he was roundly criticized for not doing enough to stimulate the economy — this despite maintaining the deficit spending ramped up over the previous eight years, as well as lowering interest rates twelve times over a three-year period.

He was subsequently voted out of office in 1992. His predecessor Ronald Reagan employed both fiscal and monetary policy to combat the recession of 1980-82, and George W. Bush did likewise for both the 2001-02 and current crisis. Unlike Bush I, both were re-elected, in part due to their perceived proactive efforts toward solving economic problems.

The evidence goes all the way back to the inception of Keynesian theory. Herbert Hoover was labeled as having ineffectively responded to the initial shock waves following the start of the Great Depression and left office in 1933 after serving just one term.

Franklin Delano Roosevelt, on the other hand, made attempt after attempt to jump-start the economy using classic Keynesian principles. Despite being at the helm for the majority of the Great Depression, Roosevelt was re-elected three times.

Good, bad or indifferent, Keynesian economics has one major advantage: the pubic can see that efforts are being made to improve the economy. Allowing the free markets to correct themselves, as George H.W. Bush was somewhat-unfairly criticized for doing during his presidency, can have the opposite effect, and create the appearance that nothing is being done. Whether or not the “right” approach is to let the markets correct themselves may be irrelevant; it becomes untenable for an Administration to appear to be sitting on its hands during a crisis. Keynesian practices provide the most demonstrative evidence to the contrary.

Keynesian Economics: Popularity and Effectiveness

The appeal of Keynesian economics has waxed and waned over the decades, but has roared back to life during the current economic malaise. The U.S. government has gone “all in” with attempts to light the fuse of economic recovery, racking up over $4 trillion of additional deficit spending in the process. According to government figures, the nation came out of the recession in 2009 and has shown moderate growth since then. However, with recent reports portending another slowdown, arguments have centered around the need for another round of fiscal and/or monetary stimulus. The dance continues unabated.

The political benefits are obvious. It’s the economic advantages that will be debated for decades to come.

Resources:

Eavis, P. Portugal’s Finance Minister: We Tried Stimulus and it Didn’t Work. (2012). New York Times. Accessed August 5, 2012.

Dave Manuel. A History of Surpluses and Deficits in the United States. (2012). Accessed August 5, 2012.

FedPrimeRate. United States Prime Rate Chart. (2012). Accessed August 5, 2012.

Gallup Economy. In U.S., 6 in 10 Do Not Expect Economy To Improve Soon. (2011). Accessed August 5, 2012.

Siegel, T. The Truth About Keynesian Economics — It works. (2011). Forbes. Accessed August 5, 2012.

Morgan, D. Most Americans Say U.S. Still in Recession Despite Data: Poll(2011). Reuters.  Accessed August 5, 2012.

Isidore, C. Recession Officially Ended in June, 2009. (2010). CNNMoney.  Accessed August 5, 2012.

Whittie, A. Keynesian Economics. (1997). ThenAgain. Accessed August 5, 2012.

Encyclopedia Brittanica. The General Theory of Employment, Interest and Money. Accessed August 5, 2012.

Greenspan, A. The Challenge of Central Banking in a Democratic Society. (1996). U.S. Federal Reserve Board. Accessed August 5, 2012.

© Copyright 2012 Walter McLaughlin, All rights Reserved. Written For: Decoded Science

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