Keynesian Theory Explained

This post is a bit 'wonkish' so proceed at your own risk.
Recently, at this year's Utah County convention Senator Bob Bennet made the observation that President Ronald Reagan was so bold and innovative in his approach to economics (Reagan had a degree in Econ) because he had studied pre-Keynes. Keynesian theory of spend your way out of recessions had not yet flooded American campuses during Reagan's college years. Keynes book, The General Theory of Employment, Interest, and Money was first published in 1936.

It was an interesting observation.

The Utah Foundation recently published a policy brief on Keynesian theory in regards to the Keynesian response or explanation to what caused the current crisis and how Keynesian's suggest we get ourselves out of this mess. I like the Foundation's material and apparently they plan a series of similar briefs each focusing on a different economic theory to explain the current situation and how each theory would solve the crisis.

Here are the highlights on Keynes:

Causes of Current Recession

Paul Krugman, an advocate of Keynesian policy, indentifies the 2007 fall in China’s stock market, and the subsequent 416-point slide in the Dow Jones Industrial Average, as the events which started the decline in investment ultimately leading to the current recession. Investors were shaken by the 2007 drop and began to panic over the number of risky mortgage-loan defaults that emerged with the collapse of the housing boom.


Keynesian solutions to current recession

As the recession continues to worsen, Krugman believes government spending is the only tool left available to stimulate the economy. Both consumer and investment confidence are down, the global effects of the economic downturn have lowered net exports, and monetary policy is not an option because interest rates are essentially already at 0%. This leaves government spending, which largely came in the form of the 2009 stimulus package.


I think its clear where President Obama's thinking comes from. It's early in the recovery(?) but it does appear things are improving. I think the jury is definitely still out as to whether this approach will work or not. But one thing is for sure - the price tag is beyond enormous. This is unchartered territory folks...