Monday, September 20, 2010

Keynes Said What?

I recently began the study of economics and I know enough to be dangerous.  But for further discussion, here are some basic points about John Maynard Keyes.

One, he says that government can correct a recession by expanding government. This expansion is financed through debt.

Two, the impact of government expansion can be calculated by estimating its “multiplier effect”.  This is difficult to estimate.  In simple terms, when you or I spend a dollar we actually give it to a business owner who spends that same dollar on something like employees, goods, rents, and other things needed to run the business.  And the person who gets my dollar from the business owner does the same thing, and this goes on and on.  The ‘multiplier effect’ is intended to estimate the growth effect of passing this dollar along the economic chain of the Gross Domestic Product.  It is not unusual for texts to talk about multipliers between 2 and 3.5 of governmental purchases on the overall economy.

Three, governments are supposed to repay their debts during good economic times.  Ooops!

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