There have been several writeups lately about John Maynard Keynes, and specifically of his ideas. There now is a growing consensus that his policy prescriptions could be best to get the market flowing again.
This is from a writeup by Greg Mankiw from the New York Times.
According to Keynes, the root cause of economic downturns is insufficient aggregate demand. When the total demand for goods and services declines, businesses throughout the economy see their sales fall off. Lower sales induce firms to cut back production and to lay off workers. Rising unemployment and declining profits further depress demand, leading to a feedback loop with a very unhappy ending.
The situation reverses, Keynesian theory says, only when some event or policy increases aggregate demand. The problem right now is that it is hard to see where that demand might come from.
Keynesian theory suggests a “paradox of thrift.” If all households try to save more, a short-run result could be lower aggregate demand and thus lower national income. Reduced incomes, in turn, could prevent households from reaching their new saving goals.
That leaves the government as the demander of last resort. 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.
Paul Krugman summarizes Keynes ideas in these bullet points (HT Mark Thoma)
Stripped down, the conclusions of The General Theory might be expressed as four bullet points: • Economies can and often do suffer from an overall lack of demand, which leads to involuntary unemployment
• The economy’s automatic tendency to correct shortfalls in demand, if it exists at all, operates slowly and painfully
• Government policies to increase demand, by contrast, can reduce unemployment quickly
• Sometimes increasing the money supply won’t be enough to persuade the private sector to spend more, and government spending must step into the breach
Robert Reich operationalizes the ideas further:
John Maynard Keynes understood: when the economy has as much underutilized capacity as we have now, and are likely to have more of, government spending that pushes the economy to fuller capacity will of itself shrink future deficits.
Conservative supply-siders, meanwhile, will call for income-tax cuts rather than government spending, claiming that people with more money in their pockets will get the economy moving again more readily than can government. They're wrong, too. Income-tax cuts go mainly to upper-income people, and they tend to save rather than spend.
Even if a rebate could be fashioned for the middle class, it wouldn't do much good because, as we saw from the last set of rebate checks, people tend to use extra cash to pay off debts rather than buy goods and services. Besides, individual purchases wouldn't generate nearly as many American jobs as government spending on infrastructure, social services, and green technologies, because so much of we as individuals buy comes from abroad.
So the government has to spend big time. The real challenge will be for government to spend it wisely -- avoiding special-interest pleadings and pork projects such as bridges to nowhere. We’ll need a true capital budget that lays out the nation’s priorities rather than the priorities of powerful Washington lobbies.