J. Miller and Company Blog

January 25, 2009

This recession & JMK (John Maynard Keynes)

According to N. Gregory Mankiw, professor of Economics at Harvard, in a NY Times article in the Business Section on Sunday, November 30th, “If you were going to turn to only one economist to understand the problems facing the economy, there is little doubt that the economist would be John Maynard Keynes.”

And “According to Keynes, the root cause of economic downturns is insufficient aggregate demand.” This thinking makes Keynes a ‘demand-side’ economist (as opposed to supply side economists who have been responsible for much of the economic policy decisions made in the US since the Reagan administration).

Mankiw discusses the 4 primary components of national economic product: consumption, investment, net exports and government spending. He explains that the first 3 are all currently unlikely to provoke much increase in demand.

When it comes to government purchases, the fourth component, he says “Calls for increased infrastructure spending fit well with Keynesian theory. In principle, every dollar spent by the government could cause national income to increase by more than a dollar if it leads to a more vibrant economy and stimulates spending by consumers and companies.” [emphasis mine]

However, he continues by saying that the potential boost in the short run provided by such government spending might well be offset by transferring that national debt to our kids and grandkids.

It is a sticky wicket, to be sure.

Read the entire article at:

http://www.nytimes.com/2008/11/30/business/economy/30view.html?_r=1&scp=2&sq=N.%20gregory%20Mankiw&st=cse

Economics and politics