American economists, central bankers and fiscal policy makers have reinterpreted British economist John Maynard Keynes’s clever idea that government spending is the best way to counteract a serious economic downturn — and have turned it into a permanent prescription. In their version of the Keynesian theory, declining growth or tumbling stock prices should prompt central banks to lower interest rates and governments to come to the rescue with economic stimulus programs. US economists call this “kick-starting” the economy.
….The only problem is that this method of encouraging growth has not stimulated the US economy in recent years, but in fact has put it on a crash course. From the Asian economic crisis to the Internet and subprime mortgage bubbles, economic stimulus programs by monetary and fiscal policy makers have regularly laid the groundwork for the next crash instead of encouraging sustainable growth. In the last decade, the volume of lending in the United States grew five times as fast as the real economy.
With thanks to Barry Ritholz
Finally the truth. Gov to justify their behaviour have perverted Keynesian economics. Keynes would be spinning in his grave.
The trouble with this type of spending is that it’s mostly raising debt for unproductive purposes. In Aust we have record govt deficits (from a position of balance) and all we have to show for it is loads of school halls, houses insulated and set to boxes for pensioners. None of these things generate ongoing wealth.
This style of intervention has been tried in the past in Germany and a few other countries. Each spell of spending generates less return until the whole mess blows up and when it does it’s from a much worse position than it was in the first place
Lesson to politicians – GDP IS NOT WEALTH
That’s it in a nutshell: raising debt for unproductive purposes — will get government in trouble every time.