MEDIA AND KEYNESIAN THEORY

Media and Keynesian Theory



Media and Keynesian Theory

Introduction

The solution to the current economic downturn as put forth by the majority in Congress and touted by most of the news media is for the federal government to enact a massive “stimulus package.” This stimulus package will be weighted towards federal government spending with some redistribution of income labeled a tax cut. The theory behind the program is fairly straight-forward Keynesian (named after John Maynard Keynes) macroeconomics. The hypothesis is that the recession is being caused by a lack of demand, particularly consumer-demand. As consumer sentiment falls, consumers save and this drop in demand causes companies to lay off workers, leading to further declines in demand, and so on in a vicious cycle. This is what has been called the “paradox of thrift.” The only way to stop this is for government to increase its spending, which will increase total demand, increase employment and save us from our own saving.

Analysis

Today there is enormous momentum for a massive “economic stimulus” plan that is based upon the presumption that the Keynesian model is correct. Yet clearly there is not a consensus among economists that government spending of more than $550 billion will have even a short term positive effect on the economy, much less a positive long term effect. To give the size of the increased spending some perspective, the total of federal government outlays was $590.9 billion in fiscal year 1980. In order to have a chance of the increased spending affecting the current recession, it must take place within the next few months. This means that, rather than the spending being allocated based on the benefits of the project being greater than the costs, it will be allocated based upon whether the project is “shovel ready.” The political floodgates are open and the lobbying for projects and programs will be fierce. There is nothing in the political process that naturally leads to an efficient use of the dollars that are up for grabs.

The tax cuts in the package will be in the range of $275 billion. There is considerably more consensus on tax cuts having a positive impact on the economy. The reason is that one does not have to rely on a belief in Keynesian economics. Tax reductions can create an incentive to produce, and hire workers in the process. Reductions in the marginal tax rates on income earnings, but particularly reductions in corporate income taxes will certainly result in greater output. The United States has one of the highest corporate income taxes in the world. Lowering the rate will make it less expensive to produce in the U.S., and create jobs and economic activity.

However, transfer payments disguised as tax cuts, such as the Bush administration's effort at fiscal stimulus in 2008, do not create any incentive to produce, which is why there was no positive effect on the economy from last year's plan. Any tax cut must be related to incentives for production, not ...