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Keynesian economic theory is named after the British economist John Maynard Keynes (1883 - 1946), whose ideas, which were based on the premise of the circular flow of money, gave rise to a host of interventionist economic policies during the Great Depression.

In Keynes' theory, the spendings of Person A contribute to the earnings of Person B, as when the former purchases goods or services from the latter. Person B, in turn, then spends his own money and thereby contributes to the earnings of Person C.  This "circular" system of money exchange helps economies to function normally, said Keynes.

When the Great Depression struck in 1929, people's natural reaction was to hoard their money rather than spend it. This stopped the circular flow of money and kept the economy stagnant. Keynes' solution was to prime the proverbial pump by means of increased government spending -- either by increasing the overall money supply or by bankrolling public-sector programs to stimulate money exchange.

According to Heritage Foundation scholar J.D. Foster, "The 1960s and 1970s were the golden age of Keynesianism. Policymakers embraced persistent budget deficits combined with accommodative monetary policy to fine-tune the economy and increase employment. This approach failed."

Former British Labour Prime Minister James Callahan said in 1967: "We used to think that you could spend your way out of recession and increase employment by cutting taxes and boosting government spending. I tell you in all candor that the option no longer exists, and that insofar as it ever did exist it only worked on each occasion since the war by injecting a bigger dose of inflation into the economy followed by a higher level of unemployment as the next step."

Keynesianism was likewise tried in Japan during the 1990s, with similarly unsuccessful results. More recently, Keynesian principles -- as characterized by massive public-spending programs coupled with skyrocketing budgetary deficits -- were implemented by the Obama administration in the United States. The most massive of Obama's programs was the $787 billion "stimulus bill" of 2009. Similarly, on September 8, 2011, Obama proposed a $450 billion "jobs bill" that would invest federal money in "more jobs for construction workers, more jobs for teachers, more jobs for veterans, and more jobs for long-term unemployed." The bill, said Obama, would be bankrolled in part by spending cuts, and in part "by reforming our tax code in a way that asks the wealthiest Americans and biggest corporations to pay their fair share."

The Obama administration further demonstrated its Keynesian mindset by extending the eligibility period for unemployment benefits to 99 weeks. As Obama's press secretary, Jay Carney, explained in 2011:

“It [unemployment benefits] is one of the most direct ways to infuse money into the economy because people who are unemployed and obviously aren’t earning a paycheck are going to spend the money that they get. That money goes directly back into the economy, dollar for dollar virtually.... Every place that money is spent has added business, and that creates growth and income for businesses that then lead them to making decisions about jobs, more hiring."

Similarly, Congresswoman Nancy Pelosi said in July 2010 that unemployemt insurance “is one of the biggest stimuluses to the economy.” “Economists will tell you,” she continued, “this money is spent quickly. It injects demand into the economy and is job-creating. It creates jobs faster than almost any other initiative you can name, because again, it is money that is needed for families to survive, and it is spent. So it has a double benefit. It helps those who've lost their jobs, but it also is a job creator.”



Why Government Spending Does Not Stimulate Economic Growth: Answering the Critics
By Brian Riedl
January 5, 2010

Keynesian Fiscal Stimulus Policies Stimulate Debt -- Not the Economy
By J.D. Foster
July 27, 2009

Obamanomics: The Final Nail In the Discredited Keynesian Coffin
By Peter Ferrara
July 12, 2012

Continual Keynesian Collapse
By David Weinberger
June 4, 2011

The Fatal Flaw of Keynesian Stimulus
By Brian Riedl
August 31, 2010

The Myth of the Multiplier
By Veronique de Rugy
November 2009

A Return to Keynes?
By Thomas Sowell
October 15, 2013


Keynesian Economics Is Wrong: Bigger Government Is Not Stimulus


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