Obama Uses Keyesian Economics to Jumpstart American Economy

President Obama plans to unveil a massive tax cut/spending increase that will push our federal expenditure to more than 10% of our nation's economic output. This will put federal spending at a level it hasn't seen since World War II. The expected effect of this expenditure is that it will jolt our economy back to health and is considered by some to be a return to Keyenesian Economics.

What is the Keyesian Economic Theory?

Keyesian Economics is based on the theory first presented by British Economist John Maynard Keyes in his book, The General Theory of Employment, Interest and Money which was published in 1936. At its most basic level, Keyesian Economics is the notion that active government intervention in the marketplace can stabilize a nation's economy and foster growth.

Mr. Keyes held that inadequate demand leads to unemployment while excessive demand leads to inflation. Given these factors, a government can monitor the levels of demand and intervene with either increased spending or decreased expenditure to keep both unemployment and inflation at a healthy balance. It is this principle that President Obama is counting on with his ambitious new stimulus plan.

The Pros of Keynesian Economics

New infrastructure

The proposed government spending tends to focus on building infrastructure. After seeing the bridge collapse in Minneapolis or waiting in endless lines at LAX, there is no question that our infrastructure is in desperate need of an overhaul. Beyond that, there are many opportunities to lead the way toward becoming a green nation which will need new infrastructure in itself.

Puts people back to work

The infrastructure will not build itself. This will put people who have lost their jobs back to work. Those jobs won't only be in construction: that's just where it starts. Once the people working construction get their checks they will start spending them on meals in restaurants and other things that are considered luxuries at this current moment. Once that spending happens, it puts other people back to work in those industries in a welcome domino effect of trickle down economics for Main Street.

Savings on social services

Once people have a cash flow again, their need for government sponsored social services will decrease because they'll be able to afford the service themselves. This will allow these services to cut their spending back to help curb the increasing national debt.

The Cons of Keynesian Economics

Cheap money

With a large influx of money into the economy, it will be much easier for people to obtain. When money is easy to obtain, we tend to make poorer spending choices than we do when we have to watch every dime. This leads to artificially inflating the value of goods which makes them more expensive and propels us into the much hated state of inflation.

Massive government spending

People who are fans of small government will find this particularly frustrating. The government will have a larger hand in everything from our jobs to the promised tax cuts.

Increased national debt

In the beginning of the stimulus package, the national debt will increase to tremendous proportions. The only way to combat this is to grow the economy until it's growing faster than the debt. This can be likened to a recent college graduate who has $40,000 of debt in student loans. He will not be able to get out from under this debt until his income reaches a level that allows him to not only pay off this debt, but continue to pay for expenses incurred on a day to day basis.

As a nation, we can make this stimulus work if we focus on growing our economy so that our income is once again higher than our debt. We can do that by returning to an economic foundation of producing goods rather than consumables. However, it's going to take all of us working together to resuscitate America's financial health.