3 Reasons why Keynesian Economics does NOT Work
Hi and welcome to another edition of strategic business insights. today we are going to talk about Keynesian economics and whether or not it is a good thing or whether it is a bad thing. And straight up I am gonna tell you right now that I am not a believer of Keynesian economics, but we all need to understand basically what it is and what the reality is today.
So Keynesian economics basically says when we have a recession in other words when people the psychology of a population thinks oh my gosh we are going into rough times they restrict their spending and so we actually end up in tough times, people spend less money so the economy contracts and when that happens the government needs to jump in and spend more money to offset that, so the population spends less, the government spends more to offset it and help the economy get back on track.
Now the theory is that in bad times government spends more to get the economy back on track, but in good times governments supposed to pay that money back okay and start another is accumulating a surplus to pay back the debt that they accumulated in the rough times okay we will get back to that in a second. Secondly the reality today is that basically all the policy makers in the western world including the United States, Europe, certainly Japan, but even countries like Canada, and Australia, New Zealand, basically all developed nations the policy makers in these countries are you pretty much unanimously Keynesian economists.
And other words they believe in this I hypothesis that we just mentioned so that when its many goes down many to do stimulus and the need to do some sort extra for physical spending to offset that reduction in consumer spending to keep the economy back on track, okay but now I have got three problems with Keynesian economics I do not believe Keynesian economics actually helps our economy and the I have three reasons for that.
Number one is what I just mentioned a second ago the government does indeed spend more on where in the rough times, when consumer spending goes down they spend more so we have these big stimulus packages and and construction projects in their throwing money into the economy. But when the economy is doing well mentally reverse the policy, they do not reverse they do not pay back any have the money they borrowed, and so the dead just goes higher and higher and higher.
And we now know who I what that leads to me for many years this has been going on for over 30 years, in the Western economies is that they have just been borrowing money deficit spending year after year after year after year almost no surpluses at all and so the debt level just keeps getting higher and higher and higher. For many years we thought this could go on forever there is no problem then or even people, there even politicians along the way he said we can we can borrow money forever we now know that is not true.
Just look at Europe, look at Greece, and Ireland and Spain, and Portugal and all these countries even Spain is kinda getting close to the line to whether not the bond market is going to start charging higher interest rates for them to borrow because they view it as a higher risk. If Spain falls than France’s next mathematically they are gonna hit that line eventually in Japan has barred enormous amounts of money and just wait they’re gonna hit that line as well, but we’ve already seen it in countries like Ireland, Portugal, and Greece you cannot do this forever you have to start paying back some of these debts.
So number one if the Keynesians reversed their policy in great years and debt suspending in bad years and then good years, they actually pay the debt back I would have a different opinion but the fact is that never happens so the first is we never reverse the policy.
Number two is that keynesian to economics breeds kind event an entitlement culture within the economy, but with you know there is tax cuts and incentives and their gonna get the stimulus money whenever things go bad there is gonna be this magic bank that shows up but froze money you are way. Now understand that people need help especially people who were living below the poverty line, are people who are unemployed, and again I believe in a progressive tax system I believe in a social safety net but I do not believe that we have to we have to limit the extent to which we have offer those incentives.
Because what happens just think someone who is on it unemployed as an example, it may receive unemployment insurance then they have got a lifeline to keep their life going and as a result of that their incentive to try something new or something different is less than what it would be otherwise. Now I am not suggesting we have to push the economy into desperation, but what happens when someone does get to desperation and by the way I have been one of those people mean, I was making no money for years really struggling and what it do it forced me I used to rack my brain to think what can I do, what can I do to get my life back on track what can I do to make some money.
One question I use myself all the time I used to say what can I do to make five hundred dollars this weekend, but there is gotta be something I can do some sort of just under some it maybe sell some sort of a program or do something to generate five hundred dollars this weekend. And of course you know I did not find many of those things but it is spurred innovation its bird innovation again, there is a balance here between the humanitarian interests of talking parrot care if people who need help but also realizing that innovation comes out of that.
When people are really desperate and they they do not have any other lifelines knots when the star really topping into the creativity in saying what could I do and that’s innovation, and that is good for the economy long-term it is good for the economy because that’s the second reason.
The third reason is that when government borrows money it crowds out private investment and hear me out on this, because it is it is very people do not really understand these mechanisms but GDP as as a figure gross domestic product, GDP equals consumer spending plus investment plus government plus exports minus imports that’s the equation. So it’s C-plus, I plus, G Plus, X minus M, is the equation of what GDP equals.
But when government borrows money when what ends up happening like their borrowing money from people or institutions in other words someone is lending the money, well if they could not lend the money to the US government in the form of Treasury Notes what would they do instead with a just leave the money sitting in a bank somewhere.
No they would take the money and find somewhere else to invest it I think about the investor perspective let’s say it is me and I have got money that I want to lend out I want to invest it somewhere, like invested in US Treasury Notes right but if those are not for sale if no one selling you if the government is in selling US Treasury notes then I have got to look elsewhere.
And say where else can I invest the money right so in other words when government borrowing is super high which it is right now, we have got annual deficits like five hundred billion dollars few years ago was a trillion dollars even higher than that huge amounts of government deficit spending that is the government borrowing money.
So when they borrow money there is all kinds of people who end up lending it to the government because it is a safe haven they feel like it is a safe investment, but if that was not there that is a money would go elsewhere and where would it go we would go to business they would go to businesses. They would look for investment opportunities in business by and that is good so when government has a lot of borrowing it crowds out, this investment and it makes it the it sets up so there is less money available for business and that is bad for the economy so I believe that Keynesian economics has three huge flaws.
The first is they do not pay back the debts that they spend and in the bad years in the surplus years when you have a good year you gotta pay back the debt. Number two all these entitlement programs and excessive social safety net programs, like a long-term unemployment insurance, I have got a friend of mine has been on unemployment insurance for like two years. It is crazy right but did that diminishes innovation in the economy, if you did not have that he would look harder for something else or maybe even start his own business but he is not doing that because he is getting money every single month are every two weeks or whatever it is.
The number three government borrowing crowds out private investment and we need private investment that is the growth that is the the primary driver of growth in the economy, innovation and investment are the two things. So I am not a fan of Keynesian economics but you have an opinion either way but hopefully this helps to shed shed some light on what the discussion on what the debate is actually all about, and I encourage you to share your comments in the in the comments below. Your thoughts in the comments below now for people who watch this video after you, thanks for watching I do appreciate it my name is Patrick reminding you as always to think bigger about your business think bigger about your life.