A few days ago, I wrote an article called "Yellen For Help - Forget It". In that article I tried to explain Keynesian economics. I attempted to do this in, what I hope, was a humorous way. What I never did explain is why it doesn't work. Let me try.
The idea is that the government takes control of the money supply and spends large amounts in hopes that it will boost the economy. So how have they done this. First, huge amounts were fed into the big banks to keep them from failing. The politicians told us that these banks were too big to allow them to fail. I translate that as "Our friends and campaign contributors run these banks". But now the banks are sitting on all this money. They aren't loaning. They aren't investing. It is just sitting in their vaults. Now, granted, this puts these banks in a great cash position, make their stock look good, but it does nothing for the economy.
Then there was the great automotive bailout. They are touting GM as a success in that high stakes gamble. But that game is not over yet. They may be punching out cars, but I don't see lots of them on the road. So, if they are sitting on dealers lots, they may be off GM's books, but they are not sold. Their venture into the electric car business has gone nowhere in spite of huge government subsidies. Chrysler was sold to Fiat. Which will leave Chrysler as a bit player in the American market. Fiat may make a nice little Euro-car, but this is not Europe. I think it will take a while for Americans to come to love those little tin cans. Maybe about when they take soccer over the real football. And I doubt Fiat executives really understand Americans and their cars. Besides all that, people are not buying many cars. A lot are out of work and those that are working are either fearful about their jobs or are getting pushed into part time positions. So, little gain for the economy there.
Millions of dollars were pumped into the green economy. But many of those companies went the way of Solyndra. They got to the bankruptcy courts before their products got to market. With a certain amount of money disappearing into private accounts, and,I understand, some into political contributions. Surprising. Once again there is no help there to the economy.
So then let us think about the hope of all good liberals for the expansion of the economy. That is what used to be called the dole. Yes, that is a pejorative term. People used to dread having to go on the dole. Now, it is a life choice. But those getting a handout, or a hand up if you prefer, pay their rent and buy food. They have little left. What little they do have left does not go into buying new refrigerators, cars, or building a businesses. So the basic structure of the economy remains unenhanced.
In a Keynesian world, factories are not built and people are not taken off the unemployment line. As thing don't improve, the true believers feel that they just haven't spent enough of other peoples money, so they keep going back to the proverbial well. If you stay very quiet and listen intently, you can hear the bucket they toss into that well hitting bottom because that well is near empty.
Coming soon, a look at "Trickle Down".