Is Obama a Keynesian?

[RI]

It appears to me that if Obama is a Keynesian, he is certainly a terribly poor one. If he were a Keynesian, he'd know that even talking about cutting the deficit in a recession is a terrible idea. He wouldn't call for the passage of a health care bill with new taxes in a recession. Sure, he passed a stimulus package, but someone who actually understood why you need to pass a stimulus package would have known that it was pathetically small and not nearly sufficient. It seems to me that Obama doesn't really have a firm grasp on economics, but rather that he does whatever is politically expedient in the name of "consensus".

Since at least when Reagan came into office, there has not been a president who actually practiced Keynesian economics, only those who have co-opted some of its tenants when it suited them.

[RI]

It appears to me that if Obama is a Keynesian, he is certainly a terribly poor one. If he were a Keynesian, he'd know that even talking about cutting the deficit in a recession is a terrible idea. He wouldn't call for the passage of a health care bill with new taxes in a recession. Sure, he passed a stimulus package, but someone who actually understood why you need to pass a stimulus package would have known that it was pathetically small and not nearly sufficient. It seems to me that Obama doesn't really have a firm grasp on economics, but rather that he does whatever is politically expedient in the name of "consensus".

You better be joking. $700 billion stimulus isn't "small".

It is when compared to the size of the problem in our economy. For deficit spending to be effective, it, through the multiplier effect, needs to replace the lost demand that is causing the high unemployment and the recession. The point of spending stimulus money is to immediately create jobs for the previously unemployed, increasing the amount of income that there is the spend in the economy, therefore increasing the flow of money to businesses who can, hopefully, use their increases in revenue to hire more people, which in turn creates more jobs and more people with disposable income, and so on. This process ultimately boosts the entire economy back to maximum productivity.

Unfortunately, $700 billion (only a third of which actually went towards jobs, so actually about $250 billion) is hardly enough to combat an unemployment rate over 10%. That’s tens of millions of people without work. Maybe if all $700 billion was directly paid to the unemployed would it have made a difference, but it wasn’t. A targeted stimulus package, which ours wasn’t, could have done much more with the same amount of money, but as for the actual way it was used, an adequate amount would have been at least $2-3 trillion.

Yes, I know that looks big, but you have to keep such numbers in perspective. The economy itself is over $14 trillion, and, thanks to the recession, the GDP is about a trillion dollars lower than it would be if it healthy, and that is after the stimulus package.

[RI]

It appears to me that if Obama is a Keynesian, he is certainly a terribly poor one. If he were a Keynesian, he'd know that even talking about cutting the deficit in a recession is a terrible idea. He wouldn't call for the passage of a health care bill with new taxes in a recession. Sure, he passed a stimulus package, but someone who actually understood why you need to pass a stimulus package would have known that it was pathetically small and not nearly sufficient. It seems to me that Obama doesn't really have a firm grasp on economics, but rather that he does whatever is politically expedient in the name of "consensus".

You better be joking. $700 billion stimulus isn't "small".

It is when compared to the size of the problem in our economy. For deficit spending to be effective, it, through the multiplier effect, needs to replace the lost demand that is causing the high unemployment and the recession. The point of spending stimulus money is to immediately create jobs for the previously unemployed, increasing the amount of income that there is the spend in the economy, therefore increasing the flow of money to businesses who can, hopefully, use their increases in revenue to hire more people, which in turn creates more jobs and more people with disposable income, and so on. This process ultimately boosts the entire economy back to maximum productivity.

Unfortunately, $700 billion (only a third of which actually went towards jobs, so actually about $250 billion) is hardly enough to combat an unemployment rate over 10%. That’s tens of millions of people without work. Maybe if all $700 billion was directly paid to the unemployed would it have made a difference, but it wasn’t. A targeted stimulus package, which ours wasn’t, could have done much more with the same amount of money, but as for the actual way it was used, an adequate amount would have been at least $2-3 trillion.

Yes, I know that looks big, but you have to keep such numbers in perspective. The economy itself is over $14 trillion, and, thanks to the recession, the GDP is about a trillion dollars lower than it would be if it healthy, and that is after the stimulus package.

My only issue with that theory is that if the stimulus was that large, then our national debt would be in a dangerous territory today.

The debt doesn’t pose that serious of a threat right now though. There are only two ways the debt can hurt a nation; it can cause inflation, or if the country can not pay off the interest, it can cause it to default. Neither of these things are currently issues.

For inflation, it is currently nonexistent. A large increase in government spending is highly unlikely to increase the price level at the current point because such an increase would only be serving to counteract the large drop in consumer spending that is the cause of the recession. If we were in a boom, such a stimulus could certainly be a cause for inflation, but in a recession this is not a realistic fear. Additionally, as most of the funding for a stimulus package would come from international borrowing and not from printing money, the inflationary impact would be lessened.

As to the ability to pay the interest on the debt, this is not a major concern for now or the near future. In fact, by stimulating the economy with spending can actually aid in this by increasing the long term tax base. By spending the money to employ people now, we are increasing the amount of money that the government collects from taxes because more people will be spending, creating more jobs, etc. and in doing so will reduce the debt-to-GDP ratio. That said, eventually, when we are out of the recession, the government must reduce its job spending and help to transition the weight of full employment back to the private sector.

[RI]

But why borrow?  Just print.

Because by printing off you are simultaneously devaluing the money you are making. By borrowing, there is less risk of this occuring, meaning that you get more of a boost for the money you spend.