Taking Stock: Keynesian economics today

By Malcolm Berko

Dear Mr. Berko:

Could you explain the economics of John Maynard Keynes in simple English and how the Federal Reserve is using his ideas to strengthen the economy?

I can’t determine whether his policies work or whether his policies are inflationary or deflationary or whether inflation is better than deflation.

I would appreciate a reply as soon as possible.

JL, Des Moines, Iowa


Dear JL:

Last week, I received two similar letters from Ames, where Iowa State University has an excellent department of social sciences and humanities. So if you’re also writing a term paper, good luck.

Did you know that people residing in Iowa are often called Iowegians?

If you are wealthy — for example, a multimillionaire or a billionaire — that means you probably own a lot of assets and stuff. Therefore, you detest deflation because by definition, the value of your assets is deflating.

Deflation robs the rich because the worth of their wines, diamonds and art, their gold, real estate and mansions fails to grow.

But for wage earners and folks like us with mortgages, health care, house care, child care and power, deflation is wonderful.

Deflation is wonderful for millions of retirees on fixed incomes who won’t have to worry about outliving their savings.

Deflation actually raises the standard of living for 90 percent of Americans. It takes less labor time to save enough to buy a big-screen TV or laptop, to fill up a gas tank or dine out with a spouse.

I see deflation as a liberating force that also dampens the growth of our welfare state. It brings people back in touch with the real world and challenges the elitist Keynesian monetary policy that encourages inflation and only benefits a minority of Americans.

Some suggest that we should embrace deflation because its process destroys the expansion of our nanny state.

Deflation also rallies against our current philosophy of social engineering and higher taxes. Deflation discourages increased government spending, restrains larger deficits and suppresses the growth of federal and state bureaucracies.

Keynes’ premise was that consumer spending is the key ingredient of a strong economy and that governments should and must regulate the business cycle.

Bah, humbug!

He espoused government intervention to moderate the boom and bust cycles of economic activity by using fiscal and monetary policy.

Keynes believed that the domino effect of “increasing aggregate demand” (all spending) escalates the overall level of economic activity, whereas “inadequate demand” creates a domino effect of long periods of unemployment and recession.

Keynes’ definition of demand requires that the money supply and the production and consumption of goods and services always be increased to maintain a healthy economy with balanced employment.

To stimulate demand, Keynesians would have governments expand the money supply (inflation) and lower interest rates, putting more and cheaper money in the hands of the masses, who will spend it.

This is called deficit spending, and as demand grows, so will employment.

Then, as employment increases, so will the number of consumer paychecks spending more money in an economy that grows big, bigger and biggerer.

Conversely, as the business cycle becomes overheated, followers of Keynes (who never worried about a paycheck) would have the government cool the economy by raising taxes and interest rates and reducing the money supply.

Keynes’ logic was awesome; his math was elegant; and his theory works like a charm—but on paper.

Keynesian economics works well in a delightful community such as Des Moines or a small village where most folks share similar social values, goals and expectations.

But in our larger society of conflicting interests, incompatible expectations, differing education levels, discordant personal values and dissimilar needs, Keynesian economics is a big fat bloody failure.

The wealthy become wealthier; the middle class shrinks like bad cotton; and families fall into poverty. Note that Japan, after years of Keynesian policies and zero interest rates, is officially in a recession.

The U.S., like Japan, is too big, too diverse and too politically and socially incompatible to respond collectively to the simple thesis of Keynesian economics.
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Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775, or email him at mjberko@yahoo.com. To find out more about Malcolm Berko and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate website at www.creators.com.
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