Does Keynesian Spending Force Savers to Spend As Well?

No time to post much, so I'll just pass along an interesting question and brief answer from the Econbrowser mail room.

A reader writes:

My wife and I were thinking of getting some work done on the house. I thought to myself that this would also be our civic duty since it would keep economic activity going elsewhere. Then I thought to myself that Paul Krugman plans to spend my money anyway-- via government stimulus spending that would come out of higher taxes (at some stage). I can't afford both new walls on the basement and landscaping for Princeton's new Krugman Park.

Three questions:

a) Am I right that such Keynesian spending is essentially to force the hand of oversaving consumers sitting on their cash? (No doubt in our collective interest.)

b) If enough people think this through would they increase savings still further and cancel out the anticipated stimulus package? (If I understand correctly this is analogous to the rational expectations critique of the 60s unemployment-inflation tradeoff.) Or at least force much higher levels of government spending?

c) Would it therefore be better to ban all economics blogs, except for Econbrowser, so as not to confuse the semi-literate (such as myself)?

Here's a quick stab at answering:

If you buy materials to redo your basement you'll help my economy at least, since we just bought some Home Depot (HD) stock last week.

The premise of the Keynesian stimulus is that we're at an inefficiently low level of total spending. According to traditional Keynesian doctrine, that could be changed either by increasing government spending (hire people to care for that park) or by lowering taxes (supposedly encouraging you to buy stuff from, say, Home Depot). And if the level of output is indeed inefficiently low, it's conceivable we could have both better basements and a nicer park if the government acts wisely.

My own view is that there are more fundamental problems beyond the low level of total spending, namely, the financial system is broken and needs to be fixed, and until both our basements and parks may go wanting, despite the willingness of Congress to increase the deficit.

You're all invited to elaborate below.

Comments

[Steven Hansen:]

ah, the old chicken and egg debate. fix financial system or fix economic engine. how about thinking that they both must be fixed in parallel.

it was interesting to me that the bailout only focused on financial system. we have destroyed trillions of assets, increased the debt to post ww2 levels, and congress is holding hearings on who is at fault. gee, it should be simple to get the economy moving again ..... right?

vote all incumbents out of office.

2008 Oct 24 05:14 AM

[Robert Jung:]

If the criminals are the ones holding court, then the crimes with continue. I agree - vote the incumbents (criminals) out.

2008 Oct 24 09:40 AM

[Tao:]

A stimulus would be a lot of help to many in the middle class and to the poor.

If the government can bail out banks and brokerages and no telling what else, then a stimulus check to the rest of us should not even be questioned.

2008 Oct 24 09:50 AM

[Kevin Lamson:]

Bail out who? Stimulate who or what? Borrowing and spending like a drunken sailor is what got us in the spot we find ourselves. As much as the Wall Street and Beltway crowd crow about this and that, the reality is that we can not borrow or spend ourselves out of this mess. We have a government that has run up a six billion dollar tab ($10,000,000,000,000) by among other things, gallivanting around the globe like an overweight jet setter financing invasions and occupations, dolling out billions to other countries or their leaders to presumably garner their favor. U.S. foreign policy = giving billions of dollars that we don't have so that the leaders of those countries will LIKE US! We don't have the financial means to pay our own bills much less be giving money away to countries like Saudi Arabia and Israel. So we borrow it.

The question each American must ask his or herself is how much unsecured credit will we allow our government to borrow on our behalf to continue to fund all of these unnecessary excesses. It is financial madness. Let's stop the madness. We must demand that our government live within a budget, not commit to things which we can ill afford and this so-called foreign policy where we give billions of dollars away to their countries. Both Americans and our government must learn to live within our respective means. Force the millionaires and billionaires who live in Manhattan to fall face first back to reality land. I mean really 200 million dollar condominiums? $1,000.00 martinis. Why the hell are we bailing these fat cats out? They along with our politicians are the primary reason we find ourselves in this current financial debacle. They have been ripping us off for years and enjoying the lavish benefits of this financial fraud.

Bail out who? Stimulate who or what? Borrowing and spending like a drunken sailor is what got us in the spot we find ourselves. As much as the Wall Street and Beltway crowd crow about this and that, the reality is that we can not borrow or spend ourselves out of this mess. Our government has run up a ten billion dollar tab ($10,000,000,000,000) by among other things, gallivanting around the globe like an aging and overweight jet setter financing invasions and occupations, and dolling out billions to other countries or their respective leaders to presumably garner their favor. U.S. foreign policy = giving billions of dollars that we don't have so that the leaders of those countries will LIKE US! We don't have the financial means to pay our own bills much less be giving money away to countries like Saudi Arabia and Israel. So we borrow it.

The question each American must ask his or herself is how much more will we allow our government to borrow on our behalf to continue to fund all of these unnecessary excesses. It is financial madness. Let's stop the madness. We must demand that our government live within a budget, not commit to things which we can ill afford and this so-called foreign policy where we give billions of dollars away to their countries. Both Americans and our government must learn to live within our respective means.

Let's force the millionaires and billionaires who live in Manhattan and American War Profiteers fall head first back to reality land. Why the hell are we bailing these fat cats out? Why are we financing two "wars" that we simply can not afford. They, along with our politicians, are the primary reason we find ourselves in this financial debacle. They have been ripping us off for years and scaring us into undertaking unnecessary military actions. The disproportionate wealth between these scum bag fat cats and the average American can be seen everywhere. I mean really, 200 million dollar Condominiums, Private Jets, Helicopters, Multiple Homes, $1,000.00 Martinis. Lavish lifestyles and ostentatious living on a level never before seen in this or any other country. Most of which appears to have been funded by excessive salaries, bonuses, free stock and funds by falsely reporting profits from financial markets that were powered by loose credit and from profits garnered from oil and military madness.

While the financial "wizards" of Wall Street and War profiteers live like Sultans, it was recently reported that many American's (48%) live pay check to pay check and are forced to borrow money through credit card debt at usurious (18% - 30%) interest rates. Remember there was a time when Americans were protected from loan sharks by usury laws in this country. Then the banks and credit card companies convinced or paid off our politicians to pass a law exempting the banks from the from usury laws. Apparently the gentleman on Wall Street were envious of the interest rates the Fellas on Mulberry Street were realizing on their "loans".

Now we are forced by our politician's vote to bail out these unscrupulous boondogglers and the institutions they run. When Sen. Barney Frank and President Bush are on the same page, you know something is amiss. I wonder if treasury secretary Pauslon would have come up with his 700 billion dollar emergency plan a few days earlier if he was the former C.E.O. and Chairman of Lehman Bros. Funny how his plan materialized when Goldman Sachs was starting to show signs of insovlency. Perhaps Mr. Paulson thought that preserving his legacy and his $560 miilion in Goldman Sachs warranted a "bailout" plan.

2008 Oct 24 12:49 PM

[Quandary:]

The question that John Maynard Keynes posed is whether should we aggressively push to rectify economic problems - within our lifetimes - or just let everything work itself out. I studied economic theory in business school back in the '80s and have been dutifully following conservative investment principals ever since. That didn't stop our investments from going down the toilet. Our son, who will be inheriting this mess, now has roughly half the money to spend on college than one year ago. While large institutions are rescued, it seems that individual equity holders in this market must take their lumps: Socialism American style. So we are way beyond B-school economics now and I am probably the least qualified to answer Keynes' question. I do agree that the current group of law makers and clueless administration have a lot of guilt on their hands and shouldn't be in office. They definitely shouldn't be allowed to manage any bailout. As to whether or not we should borrow or spend ourselves out of this mess, there is the famous Keynes quote: The idea is that rather than "in the long run, everything will even out", that "in the long run, we're all dead."

2008 Oct 25 07:49 AM