Keynesian Economics and Deficit Spending with Jacob Clifford

Well, hello there, my name is John Maynard Keynes and welcome to ACDC Economics. Today we are going to learn about Keynesianism, the greatest thing that's ever happened in the history of mankind. Whether you like his ideas or not, you have to admit that John Maynard Keynes was one of the most influential thinkers in modern times. His ideas and theories have influenced the lives of millions of people. I was born in England in 1883 and let's skip all the history junk and get straight to the economics. In 1936, Keynes wrote a book called The General Theory of Employment, Interest, and Money. In that book, he challenged classical economic theories that insisted that economies self-correct over time and that government involvement will always do more harm than good. Instead, Keynes focused on spending. He suggested that if consumer spending falls, then the government can stimulate the economy by increasing spending and increasing the money supply. In his book, he outlined the logical and mathematical reasoning for his conclusions and he believed in the idea so much that he gave an often misunderstood but clearly ridiculous suggestion. I suggested that the government could deliberately bury bottles of money and have people dig it up to reduce unemployment. Seriously? You said that? Quite so. Keynes wasn't really suggesting the government should bury money. He was just pointing out the government shouldn't sit around and do nothing and wait for the economy to self-correct. Instead, the government should actively stimulate the economy. Stimulate? I like it. Keynes pointed out that government spending in the economy leads to more spending. Economists call this the multiplier effect. Here's the idea. When the government spends money, it becomes somebody's income and they save a portion of that and they spend the rest. That spending becomes somebody else's income and they save some and spend some. That keeps happening over and over again and that's called the multiplier effect. An initial change in spending causes a ripple effect to the entire economy and leads to more total spending. And that total amount depends on how much people spend of new income. This is the idea of what Keynes called the marginal propensity to consume. The more people spend, the larger the multiplier effect. By the way, I made a video explaining this idea of geometric series and how to calculate the multiplier. It's right here. Take a look. The idea of the multiplier also explains why we have recessions. If people think the economy is going to be bad and they might lose their job, they're likely to decrease the amount they spend, perhaps going out to eat less often. Restaurant owners see their sales drop so they lay off some workers and these workers have less income and they buy less of other stuff, causing other workers to lose their job. Again, there's a ripple effect, but now it's pulling down the economy. To simplify, Keynesian economists believe that government spending is needed when there's a recession because the multiplier effect will mean more spending, more jobs, and hopefully more growth. But in real life, this idea of expansionary fiscal policy becomes tricky. First, there's the debate of whether it's worth going into debt to stimulate the economy. But even if economists and politicians agree to increase in government spending, how much should they spend? In the textbook, it makes it look easy, but the multiplier is difficult to calculate and there's no way of knowing exactly how much people are going to spend. And economists disagree on how much government spending actually improves the economy. For example, there's the broken window fallacy. It's a parable created by a French economist, Frédéric Bastiat. The story goes that a boy breaks a shopkeeper's window and is praised by onlookers for helping the community since the storekeeper now has to spend money on fixing the window. That spending will allow the glass man to spend more money on other things in So in the onlooker's eyes, breaking the window was a good thing. But that doesn't really make any sense, and if it did, all we have to do to get out of a recession is break a bunch of windows. Great idea! Perhaps we can bury the windows first. The money that was used to fix the window could have been used to buy something else that the shopkeeper actually wanted, but now that spending will never occur. The same idea applies to government spending. When the government uses tax revenue to pay for public projects and services, there's more spending in some areas, but less spending in other areas. If I give my money to the government, then I can't spend that money myself. Now that's not really a problem if the government's buying things that I would want anyways, like schools and national defense. But it is a problem if it's going to the agency that's bearing bottles full of money. But what about if the government borrows the money? Well, even in that case, the money isn't free. If the government borrows money, then that leaves less money for companies to borrow. That can lead to higher interest rates and less investment. Economists call this crowding out. But even if there's plenty of money to borrow, there's still a problem with debt. Whatever the government borrows, eventually they're going to have to pay back. Now I know it seems like I've been kind of mean to Keynes in this video, and that's not my goal. The goal is to show you that Keynesian policies, like all policies, have a trade-off. That being said, a lot of economists agree that the Keynesian policies of increasing government spending during the financial crisis significantly reduced the depth and length of the Great Recession. But the question is, was it worth it? Well, I don't know. Tell me what you think in the comments below, okay? Until next time. Thanks for watching ACDC Economics. If you'd like to learn more about the multiplier, click right here. If you'd like to review for exam or learn something else... If you want to review for exam or learn more economic... This is the worst British accent I've ever heard. And if you'd like to review for exam and learn other things, click right here. Also, please make sure to subscribe and leave a comment and tell me what you think about me, John Maynard Keynes. Thanks for watching. Until next time.