Keynesian Opportunities

By Aron Khurana | March 6, 2009 at 4:41 pm | Opinion | 18 comments | |

The failures of government projects such as No Child left Behind and the Hurricane Katrina rescue efforts have rendered the American public weary and skeptical of government initiative. These sentiments are consistent with new poll results showing that six out of ten Americans fear that the American government is expanding too much under the current administration. While fiscal conservative theory maintains that the government should not meddle in functions that can originate in the private sector, the current economic catastrophe that has engulfed the United States of America may offer an opportunity to revitalize the nation while simultaneously stimulating the economy.

After spending years entrenched as the global economic superpower, America finds itself with a struggling economy, a financial system in threat, and many glaring weaknesses in education, healthcare, infrastructure, transportation, and energy dependence. While many who oppose public spending expansion will point to the failures of the Japanese fiscal efforts of 1997 and the recurrence of high unemployment and low productivity shortly after FDR’s New Deal, Keynesian economics can be successful given the right direction. Japanese policies may have failed to stimulate the economy because of the Bank of Japan’s insistence in returning to fiscal austerity with higher interest rates and taxes, and FDR’s policies have been statistically shown to have dampened productivity from the private sector during the fiscal deficit spending.

The current state of the American economy presents a situation where a well-directed expansion of government expenditure may provide opportunity and sources of growth for the overall economy. Keynes felt that a staple of fiscal recessionary efforts should be that the government should not take the place of private investment and productivity but rather work to invest in areas that are deficient of investment and focus from the private sector. Three areas where government effort may be needed are transportation, alternative energy, and healthcare. Each of these arenas provides opportunities to stimulate the American economy, and build a better nation for constituents.

Government efforts to improve American transportation will develop several positive externalities for the US. England recovered slower from the Great Depression than the United States of America partly due to their lower transportation capability. Inferior transportation left England more sensitive to frictional unemployment and high supply costs. Transportation investment will also reduce American’s dependence on foreign cars and petroleum reducing American imports and thus increasing GDP. America’s gaping trade deficit will be reduced by this measure which has been proven to increase the effect of government expenditure on stimulating the economy. This can also be achieved by a shift towards green fuels.

Investment in healthcare, if done efficiently, has the potential to lower healthcare expense for the American populace and firms already struggling with high costs in a depressed profit environment. Lower healthcare costs for the American public can stimulate consumer demand which historically accounts for about sixty percent of GDP. Also, relieving firms from higher healthcare expenses can stimulate consumer demand by allowing firms to retain more of their employees. These saved workers will then have more consuming power. Additionally, firms with lower healthcare costs will have more money to invest in expanding their operations, stimulating national investment demand. Investment demand has been identified by many economists from different schools of thought to be the most difficult aspect of an economy in recessionary environments.