Deficient Spending & Economic Rebound

In recent months, news from Europe had mainly covered economic downturn of the Euro – official currency of the European Union.  Following the subprime melt down in 2008, the United States enacted stimulus packages to entice the general economic cycle.  Many other industrial nations enacted similar legislation to protect their economy and deter economic recession.  

Stimulus packages are part of Keynesian economics, where deficit spending promotes jobs and infuses the general market with cash to empower the whole economic cycle.  Keynesian economics was designed by British economist John Maynard Keynes during the Great Depression.  Keynes argued that fiscal and monetary policies could stop economic recessions.  His ideas promoted the First and Second New Deals under FDR’s administration. 

In Keynesian economics, the government promotes economic wellbeing through deficit spending.  The two main tools are fiscal and monetary policies.  Fiscal policy refers to government usage of expenditure and revenue collections to influence economy.  Monetary policy refers to cash flow control through central banking system.  Thus, when President George W. Bush enacted tax cuts at the beginning of his first term, he in fact affected the United States fiscal policy.  In contrast, Obama’s stimulus packages increased cash flow within the United States altering the monetary policy. 

But do Keynesian economics work?  The answer is yes and no.  In the short run, Keynesian economics provides opportunity to avoid economic rescission at the expense of increasing public debt.  In the long run, increased public debt due to Keynesian economics overloads government’s ability to sustain jobs and social welfare.  In order to medicate the problem, many governments enact conservative economic policies following a period of Keynesian directed economy through higher taxation and systematic reduction in social welfare programs.  Currently, the British Parliament announced plans for tax hikes and cuts to social welfare programs.  Also, cash strapped California had made similar moves beginning with simple consumer tax hikes to massive budget cuts to the state’s welfare and educational programs.

 At the same time, recent economic progress in the United States is directly linked to stimulus packages.  Not only had they created jobs, Obama’s stimulus packages helped to save the private banking industry in the United States.  The list is extensive and includes many of the renowned banks such as Bank of America and Citibank.  But with the recession moving across the Atlantic Ocean to Europe, will and can the United States continue pursuing Keynesian economics?  It will be interesting to observe, especially as Midterm elections are coming up in November.