What Prof. Keynes REALLY Advised Re “Stimulus Spending”



Copyright 2009 Craig Cotora

“The difficulty lies not so much in developing new ideas

as in escaping from old ones.” J.M. Keynes

While The Government debates a “Second Stimulus Plan” and The Pundits assailed the First Plan as “Krazy Keynesian deficit spending”—e.g. The Ethan Show 3-11-09; it seems a most appropriate time to take a few moments to consider what Prof. John Maynard Keynes actually advised regarding “appropriate” government stimulus spending.

Of course, it is probably only fair that we excuse such pundifications such as “Keynesianism—the theory that the public sector should control the private sector through strict regulation…” [Ibid.] when Professor Keynes in fact spent most of his seminal work—the General Theory of Employment, Interest and Money—arguing that pro-active “appropriate” government “intervention” in the macro-economy was necessary to ensure the success of both capitalism and democracy.

That is “fair” because one of the very few things that all economists of any “school” would agree on is that the General Theory is not “an easy read”–a fact Prof. Keynes admitted himself by spending practically the rest of his life explaining what he meant in the General Theory on the lecture circuit and in numerous articles.  And what Harvard Professor Alvin Hansen wrote in 1953 appears just as true today: “Nowadays one reads a good deal of the literature about Keynes but little in the General Theory itself.”

Actually, all one has to tackle to determine what Professor Keynes actually would advise us today regarding “appropriate” government stimulus spending is Chapter 23 of the General Theory– in which Professor Keynes tried to synthesize the conclusions and therums of the previous 22 chapters to define what he considers “the most appropriate” role of a democratic government in the macro-economy.

Not surprisingly—in that The General Theory was written in the midst of The Great Depression—Keynes believed that the principal purpose of government fiscal policy was to “maintain long term full employment” (hence “the General Theory of Employment…”etc.).   And more importantly regarding what Keynes would actually advise our government today regarding “stimulus” spending was that how the government spent stimulus funds was even more important than when [according to Keynes when economic indicators were “pointing to a downturn” in the economic cycle—i.e. before a recession–] and how much [an “appropriate amount” Prof. Keynes said for the economic conditions at the time.]

As Prof. Keynes emphasized in his numerous defenses of the the General Theory, “long term” full employment—i.e. not creation of temporary state road, bridge, etc. “infrastructure” jobs but “permanent” ”industrial” infrastructure employment–should be the focus of government economic stimulus spending because this was “just basic economics”  This particular type of stimulus spending creates more high skill, high wage jobs, the tax base increases accordingly, resulting in more tax revenues and thereby over time transforming government budget deficits to budget surpluses.

Professor’s Keynes “conservative” critics also might like to know, since is is apparent from their pundifications about Keynsian Economics that they have not actually studied his work, that once the government realized budget surpluses from “long term full employment” stimulus employment spending, he then also advocated reductions in income tax rates.   Besides maintaining a healthy democracy through “full employment,”  a “primary objective” of a government fiscal policy of “long term full employment” was lowering of income tax rates. (Pop quiz for Pundits Of Any Color: Who said: “The avoidance of taxes is the only intellectual pursuit that carries any reward.”? Yes Gentlemen…and Lady…that was J.M.K.)

Given what Professor Keynes actually advocated in the General Theory, what would he think of the current Administration’s interpretation of “Keynsian Economics”–if that is what the Adminstration’s current stimulus policy is intended to be—of “bailouts” and “$ for States”? Most likely a prolonged knashing of teeth since obviously neither bailouts of failed banks, S&L’s and investment houses nor $ for state infrastructure projects is the type of stimulus spending that would create “long term full employment” that would sufficiently expand the tax base to create budget surpluses and permit the lowering of tax rates.

Rather Prof. Keynes would certainly advise that that Trillion Dollars [if he would have actually approved of that much “deficit” spending] would much more productively be spent on grants, licenses and/or loans to corporate America to vastly expand American aero-space and “green” environmental industries—which would create exactly the kind of “long term full employment” Keynsian fiscal policy argues is required to expand the tax base sufficiently to create government budget surpluses and reduce tax rates.

There would also be other major benefits of ”long term full employment” stimulus spending in America’s environmental and aerospace industies. These are all industries whose products the rest of the world would demand (e.g. there is almost not a single manufacturing, service or energy development or consumption product or process that could not be made significantly more environmentally friendly.)  Consequently this type of government stimulus would not only convert America from a debtor to a creditor nation, but this type of spending would also easily accommodate the shifting of unemployed and underemployed American workers—particularly auto and other assembly line workers—into industries where they can still realize their American dreams with little additional re/training. [After all, if they can assemble products as complex as the modern automobile, they certainly could assemble a wide variety of aero-space and environmental machinery and/or equipment.]

In conclusion, if the Administration really desires to apply “Keynesian Economics” to help resolve the current economic crisis and if the Pundificators really desire to constructively criticize government fiscal policy, it would be best for both camps to actually read the General Theory—or at least Chapter 23—and Professor Keynes subsequent explanations of it; simply because if the government actually applied Keynesian full employment fiscal policy—our nation would have a good start on not only ending The Great Recession, but also restoring America to being the world’s leading manufacturing economy for generations to come.


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