The Keynes To The Car

I've been meaning to drop a quick note regarding the Keynesian economics motivating the incoming Obama administration.  You can see Bruce Bartlett's "What Would Keynes Do" for some basic background.  A snip:

Keynes argued that the only thing that will really work is if the federal government uses its resources to purchase goods and services. It must buy "stuff"--concrete, computers, paper, glass, steel--anything as long as it is tangible. In other words, the government must spend the way households do, by buying things.

It must also employ labor, because much of what people spend money on today is in the form of services. This doesn't necessarily mean putting workers on the federal payroll, it just means that, to the extent that the government purchases services, this will also help raise spending in the economy. (snip)

But in the end, there is a limit to what the Fed can do by itself. At some point, government spending must be the engine that pulls the economy out of recession, because only that can compensate for the fall in private spending that has caused velocity to drop and brought on deflationary conditions.

But it must be the right kind of spending. It must draw real resources out of the economy--that is the only kind of spending that will work. Buying bad mortgages and sending out more rebate checks won't do any good.

Obama, with his 21st Century New Deal seems to be buying some of this prescription.

What are the problems with the notion that government spending will spur the economy?  First, as I noted recently here, this is a theory based on consumption, that we need to buy more "stuff."  But Bartlett, as any thinking person must, concedes that this means more debt.  So in other words, Obama is suggesting we buy more stuff with money we don't have.  Isn't that how we got into this mess?

While we do face a liquidity issue and the specter of deflation, this can be prevented by loose monetary policy (which we have) and a massive reduction in capital gains and corporate taxation.  Of course, this doesn't work in Obama class warfare rhetoric, but it would provide for a increase in available capital for business investment.    These policy moves would stimulate investment and business profitability and have the additional virtue of not adding to the public debt.

Prof. Blanchard (here) and I (here) have argued that the enormous debt held by our nation represents a burden on our nation that we must face up to.  Obama's economic plan, so far at least, indicates that he is willing to further mortgage our future for immediate political gain.  Meet the new boss, same as the old boss.  Not much change to believe in there.