Friday 28 November 2008

We are (almost) all Keynesians now.

The Economic Policy Division of Anybody-Want-A-Peanut? has been doing a lot of thinking recently about the current global economic crisis. Well, they should have been at least, but those slackers spent most of their time playing Rock Band and looking at nude photos on deviantArt. However we do have some thoughts on the matter:

Richard Nixon once said "we are all Keynesians now". That is particularly true during a recession. We can generally rely on monetary policy to keep the economy on course by maintaining price stability, but when the economy veers off into the crapper like it is now, there is a temptation to use the turbo boost of a good old fashioned Keynesian demand shock to try to bump it back on course.

As far as I know, the jury is still out regarding how effective it is. For example, some economists has suggested that it could require tens of billions of dollars to make even a modest impact on the Canadian economy. Nevertheless, elected officials don't want to be seen as bystanders as people lose their jobs, so they "take action" by opening up the bank account and spending money to try to recreate those jobs.

Everybody is doing it: Britain is doing it; Obama has indicated that he's willing to pile on to the massive pile of debt in the US in the name of Keynesian fiscal stimulus; back home in Manitoba, spendaholic Gary Doer is practically drooling over the prospect of throwing around more money. He's like a kid at Christmas with a brand new excuse to spend, and new balanced budget legislation waiting to cover him in case he (oops!) happens to spend a little too much. Even here in Winnipeg there are big plans to spend more money.

The only leader not hopping aboard the Keynesian Express is Mr. Harper. The recent economic update included no fiscal stimulus, just a couple tweaks to cut spending and increase investment. What does The Peanut think about this? Well, the AWAP EPD couldn't give me a straight answer (I really am paying those guys too much) but the opposition certainly don't think riding out the storm is a good idea and they may topple the government to prove it. Can you imagine? A party with no leader trying to form a coalition to replace an elected government a month after the election? Ottawa is so damn disfunctional.

While I personally feel that Keynesian-type fiscal manipulation is generally overrated, Harper may have miscalculated on this one, because what I think doesn't matter. The thing is, most people are Keynesians whether they know it or not. They want to see their government doing something when the economy is falling apart, and ultimately that could be the downfall of Mr. Harper. I think the Liberals may back down now that the Conservatives have backed off their plan to cut funding to the parties, but boy .. it could get interesting if they stick to their guns.

wiki: John Maynard Keynes


Anonymous said...

Piling more money into the system is delaying what is going to come. We will see the bubbles get bigger and the busts bigger too. The government should stay put and ride out the storm. People need to start saving again, too. Interest rates need to go up.

cherenkov said...

We may need to ride out the storm, but try telling that to Layton and the Liberals. (Who's in charge of the Liberals now anyhow?)

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