Is Economist Keynes Right On Spending In A Crisis?

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The administration's stimulus package is based, in part, on the theories of economist John Maynard Keynes. He believed that a huge dose of government spending is what helps in an economic crisis like this one. Our Planet Money team talked to economists of all stripes and found some Keynsians have doubts.


We return today to the series of economist John Maynard Keynes. The administration's stimulus package is based in part on Keynes's idea that a huge dose of government spending is what helps in an economic crisis like this one. Our Planet Money team has been talking to economists of all stripes, and was surprised to find that some current Keynesians have doubts.

NPR's David Kestenbaum joins me now. So David, this is a big moment for Keynesians, a big test. What do they think of the stimulus package?

DAVID KESTENBAUM: Well, you know, as we said, some of them - they have disappointments with it. Look, there are lots of economists out there with reservations. But we thought, okay, when we get to the Keynesians, we'll call them up and they'll say, no, here are the arguments; here's why it's going to be great; it'll work. That didn't quite happen.

Here is Steve Fazzari. He's a Keynesian at Washington University. He says he believes in his heart he's right. Congress needs to spend to make up for the fact that people aren't spending, to put unemployed people back to work again. But when he looks at the legislation that Congress is considering, there are things in there that he just wouldn't count as stimulus.

Mr. STEVE FAZZARI (Washington University): When you look at - what a lot of this is, say, extending unemployment benefits or helping people to keep their health insurance after they're laid off, these things are worthy extensions of the safety net, so I strongly support them. But to the extent that this is just keeping things where they are, it's not really stimulus. It's preventing things from getting worse.

WERTHEIMER: But you could imagine, though, if people didn't have to worry about those things, they then might feel a little bit more like spending.

KESTENBAUM: I think that's definitely true. But, you know, from the economists' point of view, they're always thinking, how do we get the biggest bang for the buck? What's the best way to do this? And the core of the Keynesian idea for how to fix things is that you need to encourage spending. So you don't want money to end up in a mattress somewhere.

The Keynesians will tell you that, look, 70 percent of our GDP is consumer spending, and that is dropping really fast. So the government needs to take up the slack. But that's a lot of slack, which gets to another concern of Steve Fazzari's.

Mr. FAZZARI: The hole that has to be filled here is really big. So, even though these numbers sound huge in absolute terms, relative to the size of the economy, I worry that this may not be large enough.

WERTHEIMER: Now, what about tax cuts, David? How do the Keynesians you've talked to feel about that part of the stimulus?

KESTENBAUM: They say they are totally for Keynesian tax cuts, which…

WERTHEIMER: Which would be what?

KESTENBAUM: Which would be ones that actually stimulate spending. But, you know, you have to really carefully think these things out. So, Adam Posen -he's another Keynesian; he's at the Peterson Institute - he has doubts about some of the tax breaks.

Mr. ADAM POSEN (Peterson Institute): If you think back to last spring, we had a bunch of tax cuts last April, May and essentially, one-third of the money got spent. Because if you're a normal household, and you get a tax break and it's a hard time, you say, well, I'm not going to take all the kids out to a movie now, I'm going to put most of it away and try to rebuild what was in my 401k and what was in my savings account.

And so the multiplier - meaning how far it gets passed around the economy - on tax cuts, if they're household tax cuts, is pretty low in this situation.

WERTHEIMER: So, can't you think of some good news here, David?

KESTENBAUM: Well, Adam Posen, who you just heard from, he wrote on his Facebook page: Adam is very happy because the Obama team and Democratic leadership are moving on a big stimulus. So, he is happy about it. We talked to James Galvres(ph), another self-described Keynesian, who said he thought the stimulus package was pretty good, all things considered.

I think what you're seeing here - it's sort of like a kid who sees something on television he really wants, like a remote-control car, and then you actually get it as a gift and you open it up and you say, oh, that's what it is? You know, on the one hand they have their theory and it's really obvious that they want a stimulus package, but it's got to happen fast. And that's just hard to do, especially when you have Congress that has to put it together, and Congress is not filled with economists.

WERTHEIMER: NPR's Planet Money correspondent, David Kestenbaum. David, thank you.

KESTENBAUM: You're welcome.

WERTHEIMER: For more Planet Money coverage, go to its blog and podcast at

The New York Times has a look today at the jobs that are being lost in this economic downturn. There have been major cutbacks in industries where most of the workers are men, like manufacturing and construction. But fields where many women work, like education and health care, have not been affected nearly as much.

The newspaper reports that men have received 82 percent of the pink slips handed out since this recession started. And the paper says if the trend continues, the country will have something it's never had before: more women than men in the workforce.

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