The Keynesian argument for government spending is that when people are scared of the future, they put their money in their mattress instead of spending on consumption goods or investment goods. So, goes the Keynesian story, the government needs to step in and stimulate aggregate demand. So, the story continues, building pyramids, digging ditches, fighting a war (all with borrowed money), puts money in the hands of those at work today on the shovel-ready projects.
But if the people are scared of the future, the shovelers put their new found money under the mattress and the multiplier doesn’t multipky. At best it adds.
The Keynesian defense has to be that when people see government stepping in, it gives them confidence and reverse those animal spirits. Could be. Equally plausible is that when people see the massive accumulations of debt, they know that higher taxes or default is coming and this encourages them to actually put even more money under the mattress.
The Keynesian free lunch is a dangerous meal to serve to politicians who always want an excuse to spend money on their friends financed by other people’s money.
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The reason why the Keynesian argument works is because the reason people are scared about the economic future has to do with people worried about their income.
at the least the people put to work from the stimulus projects will go out and spend and that spending will be a bust to the economy.
by doing stimulus projects you put people to work. People with a job tend to look more favorably about the future then those with out and since they have an income to spend, they will.
Also most people wont think about the fact that they will have to pay for the debt in the future…at least they don't think about it much, when compared to people thinking about their financial needs now.
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