Here’s the thing that almost no one will tell you about Keynesian stimulus. The truth of the matter is, if you make it large enough it will probably work. OK … hang on… I haven’t slipped a cog. Dr. Friedman isn’t spinning in his grave or anything. In fact he’d probably agree. But he’d still say (as I do) that it simply isn’t worth the cost.
Lets say we gave Paul Krugman his dream. We'll give him say...10 Trillion to hire people to dig holes, and another 10 Trillion to pay others to fill them in. Any child (even Krugman) will tell you that there won’t be any wealth created in that process, but it will get capital flowing. Those people will leave work every day and buy shovels, or gloves, or new boots or whatever and the people that make and sell them to them will generate wealth. So if you spend enough, there will absolutely be wealth created, and the Keynesian stimulus will work.
That’s the benefit. Now let’s talk about the cost.
Obviously 20 Trillion in new deficit spending couldn’t possibly be supported by our economy, but all that money will still have to be paid back. And paying back that money means higher taxes. It would require a level of future taxation which would bankrupt the nation. In fact, since so much of our current budget is applied to debt service, it’s accurate to think of that portion of our tax base as applying to past Keynesian stimulus. Our economic growth today is lower because we already spent the money in the past.
In that way Keynesian spending is just like an addictive drug. You build up a tolerance to it in the form of a greater portion of your existing tax revenue devoted to serving the debt of past stimulus. And at this point, the amount of deficit spending we’d need to feel the buzz we’ve so come to love, would be so large in it’s own right that it would very likely kill us.
So would another Keynesian Stimulus plan like the one the president is offering actually work? Well not in the size he’s proposing no. But if it were large enough... sure... it probably would yeah. But would it be worth it? Well since it would be so large as to destabilize the entire US economy I'd have to say no. It would cause rampant commodity inflation, rapidly rising interest rates, or both.
And even if it did work, the future tax level required to pay it all back would be so choking that we wouldn't survive it. So the very best case is that we'd last until the end of the next business cycle before utter economic collapse. That doesn't seem like such a great plan to me.
It's wildly inefficient. Even working from a clean slate with no past stimulus to make up for, it's still wildly inefficient. And at this point, we've already had too much Keynesianism to cope with the level of inefficiency that would be required to solve things.
It's like putting Gin in your diesel engine. It may work, but there are many better ways to solve things. And at this point any more of it will do more harm than good.
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