Those pesky animal spirits

by Russ Roberts on September 24, 2009

in Stimulus

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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