The horizon is not so far as we can see, but as far as we can imagine

When Keynesian Stimulus Works

John Maynard Keynes

John Maynard Keynes, 1933

It has become fashionable in many circles to denigrate Keynes and Keynesianism because unconventional monetary policy hasn’t worked.

I’m not going to mince words, people who make that argument are idiots.  Unconventional monetary policy is not Keynesian stimulus.

Keynesian stimulus is about widespread demand: giving money to rich people is not Keynesian stimulus.  The government spends, or even just gives money to people to increase their spending.

Unconventional monetary policy is not Keynesian stimulus.

Further, Keynesian stimulus only works where there aren’t supply bottlenecks. If you were to do (actual) Keynesian stimulus today it wouldn’t work, because oil would rocket past $150/barrel and the economy would immediately collapse.

Keynes did not concentrate on this issue because it wasn’t a problem in his time period: the world, and more importantly, the world’s keystone economy, America, was awash with the stuff.  It wasn’t a bottleneck.  The only bottleneck, before the US went off gold, was the gold-standard.

The bottleneck issue is also relevant to sinks and renewable resources: spending money indiscriminately in a way which leads to more commercial fishing, say, would be moronic, given collapsing fish stocks.  Spending it in ways which lead to vastly more carbon or methane would also be idiotic.

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We are facing challenges Keynes did not, but that doesn’t mean he wasn’t right, that means that the policies he suggested need to be modified for the changing times. If you cannot do so, you do not understand either Keynes, or your own time.

This is the great problem with the work of the great political philosophers; of the sages: they come up with a solution specific to a time, and fools think that it should be applied verbatim for all of time, while other fools think “if it doesn’t work verbatim, it’s all crap.”  Doing Keynesian stimulus would be simple, if it was desired. You just make sure the money gets to ordinary people and is used to reduce carbon emissions and uses of other bottleneck resources, while making sure that money doesn’t pool at the top.  (Stopping money pooling at the top is mostly a solved problem. Start with 90% tax rates on all income over 1 or 2 million or so, close loopholes, and don’t privilege any income.)

But Keynesian stimulus hasn’t been done, either smart or stupid: not even the widespread demand part has been done.  So people who rag on about “Keynesianism” are ragging on about a straw man: a policy which has not even been pursued.

Keynes wouldn’t have any problem prescribing solutions for today’s economic problems, and neither should anyone who understands his work.  And those who deride Keynesianism either don’t understand it, or don’t actually want to see widespread prosperity.


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The Quick and Clean Guide to Fixing the Economy (Keynesian Stimulus #2)


  1. EmilianoZ

    It is still unclear to me how, in practice, you would do Keynesian stimulus today. Give people money and tell them not to drive their cars?

  2. Ian Welsh

    I started a comment and it turned into a post. I’ll detail one way to do it in a post later this week.

  3. mike

    Thank you for this. It’s extremely frustrating to see otherwise intelligent commenters and bloggers talk about Keynes as if he would have anything to do with them. From now on, I’ll just link them to this post. Especially the “idiots” part.

  4. second on the ‘ idiots’ point.

  5. Batalos

    ‘Keynes wouldn’t have any problem prescribing solutions for today’s economic problems, and neither should anyone who understands his work’

    – “… Let us, for the sake of argument, suppose that a hundred years hence we are all of us, on the average, eight times better off in the economic sense than we are to-day. Assuredly there need be nothing here to surprise us.

    Now it is true that the needs of human beings may seem to be insatiable. But they fall into two classes – those needs which are absolute in the sense that we feel them whatever the situation of our fellow human beings may be, and those which are relative in the sense that we feel them only if their satisfaction lifts us above, makes us feel superior to, our fellows. Needs of the second class, those which satisfy the desire for superiority, may indeed be insatiable; for the higher the general level, the higher still are they. But this is not so true of the absolute needs – a point may soon be reached, much sooner perhaps than we are all of us aware of, when these needs are satisfied in the sense that we prefer to devote our further energies to non-economic purposes.

    Now for my conclusion, which you will find, I think, to become more and more startling to the imagination the longer you think about it.

    I draw the conclusion that, assuming no important wars and no important increase in population, the economic problem may be solved, or be at least within sight of solution, within a hundred years. This means that the economic problem is not – if we look into the future – the permanent problem of the human race.

    Why, you may ask, is this so startling? It is startling because – if, instead of looking into the future, we look into the past – we find that the economic problem, the struggle for subsistence, always has been hitherto the primary, most pressing problem of the human race – not only of the human race, but of the whole of the biological kingdom from the beginnings of life in its most primitive forms.

    Thus we have been expressly evolved by nature – with all our impulses and deepest instincts – for the purpose of solving the economic problem. If the economic problem is solved, mankind will be deprived of its traditional purpose.

    Will this be a benefit? If one believes at all in the real values of life, the prospect at least opens up the possibility of benefit. Yet I think with dread of the readjustment of the habits and instincts of the ordinary man, bred into him for countless generations, which he may be asked to discard within a few decades.

    …For many ages to come the old Adam will be so strong in us that everybody will need to do some work if he is to be contented. We shall do more things for ourselves than is usual with the rich to-day, only too glad to have small duties and tasks and routines. But beyond this, we shall endeavour to spread the bread thin on the butter – to make what work there is still to be done to be as widely shared as possible. Three-hour shifts or a fifteen-hour week may put off the problem for a great while. For three hours a day is quite enough to satisfy the old Adam in most of us!

    There are changes in other spheres too which we must expect to come. When the accumulation of wealth is no longer of high social importance, there will be great changes in the code of morals. We shall be able to rid ourselves of many of the pseudo-moral principles which have hag-ridden us for two hundred years, by which we have exalted some of the most distasteful of human qualities into the position of the highest virtues. We shall be able to afford to dare to assess the money-motive at its true value. The love of money as a possession – as distinguished from the love of money as a means to the enjoyments and realities of life – will be recognised for what it is, a somewhat disgusting morbidity, one of those semi-criminal, semi-pathological propensities which one hands over with a shudder to the specialists in mental disease. All kinds of social customs and economic practices, affecting the distribution of wealth and of economic rewards and penalties, which we now maintain at all costs, however distasteful and unjust they may be in themselves, because they are tremendously useful in promoting the accumulation of capital, we shall then be free, at last, to discard.

    I see us free, therefore, to return to some of the most sure and certain principles of religion and traditional virtue – that avarice is a vice, that the exaction of usury is a misdemeanour, and the love of money is detestable, that those walk most truly in the paths of virtue and sane wisdom who take least thought for the morrow. We shall once more value ends above means and prefer the good to the useful. We shall honour those who can teach us how to pluck the hour and the day virtuously and well, the delightful people who are capable of taking direct enjoyment in things, the lilies of the field who toil not, neither do they spin.

    But beware! The time for all this is not yet. For at least another hundred years we must pretend to ourselves and to every one that fair is foul and foul is fair; for foul is useful and fair is not. Avarice and usury and precaution must be our gods for a little longer still. For only they can lead us out of the tunnel of economic necessity into daylight”

    John Maynard Keynes. “Economic Possibilities for our Grandchildren”. 1930

    Not bad for 1930… I like to reread this from time to time – though don’t have his optimism concerning human’s ability to make such a transition in a smooth way if at all

  6. Monster from the Id

    “If the economic problem is solved, mankind will be deprived of its traditional purpose.”

    So we’ll need a new purpose? OK.

    How about exploring strange new worlds, seeking out new life and new civilizations, and boldly going where no one has gone before? 🙂

  7. Greg T

    I’m glad you wrote this. I see too many economic websites conflate quantitative easing with Keynesianism. Proponents of the Austrian school are particularly guilty of this. When I see that, I know the writers know nothing about Keynes’ theories.

    If anything, Monetary expansion we’ve seen these past few years more resembles monetarism – acolytes of Milton Friedman. Keynes himself was suspicious of monetary policy’s efficacy in a depression. The entire concept of a liquidity trap means businesses and households will hold cash even at zero interest rates. This makes monetary policy ineffective .

    New Keynesians like Paul Krugman have been arguing for fiscal stimulus and demand-driven policies for years. The problem is the political system, controlled by the rich, won’t consider it.

  8. Greg T

    Taxing the rich would be an effective means of reorienting the economy. Taxes alone might not work. Avenues for speculation would have to simultaneously be closed through capital controls and regulation. Concentrated capital would be forced to investin real economic development instead of leaking out to obtain fast returns with no obligation.

  9. Lisa

    Give people a load of cash, uses taxes to channel the spending into areas that would not be inflationary.

    For example, have a carbon tax (or vary VAT/GST by carbon content). Basically you hold the cost of the carbon invariant to the extra spending power so they will not spend more on high carbon products and consumption remains constant (or even lowers).

    Similar tricks can be made with investment spending channeling.

    Corporate taxes must be high, so that companies have to spend it or lose it. Either higher wages or more capital investment. Close down nonsense like share buybacks. Basically they have to spend their profits sensibly or lose them.

    Agree, $1M salary and 90% tax.

  10. Trixie

    The world is awash in capital and liquidity that will eventually eat itself if not resolved. There is no one — and I mean no one, including Keynes and even the wealthy — that should want to print more claims against the economy in the form of “demand stimulus”. The last few years of activist monetary/fiscal policy in the form of QE ($4.5T), ARRA ($800B plus 4 years of $1T+ deficits resulting in record-breaking corp profits), and TARP ($700B, not to mention the additional trillions in direct Fed loans to insolvent banks as homeowners drowned)…all went straight to the top of the wealth ladder. And stayed there. Multinationals alone are currently sitting on ~6T in cash hoards. That’s not going to stay there forever.

    Meanwhile the masses are still worse off than before the recession. The vast majority of new jobs have been in low-wage industries (thanks Taco Hell!), paying 23% less than the jobs lost. Median family income is back to mid-90s levels and median wages have been stagnant for 30+ years as inequality (by any measure) has soared. Student loan debt is topping the charts, and the latest “best new thing” for financial predators is subprime auto loans.

    So does anyone think we may be missing SOMETHING?

    If capitalists can’t think of anything else to do with their decades of state-propped-up-ill-gotten-gains, I have a few suggestions:

    Start pulling it down: Strengthen labor bargaining power, shorten the work week, legislate 6 weeks paid vacation time, raise the minimum wage to a living wage, and tie CEO compensation to its median worker instead of short-term market gains.

    Tax Wall St transactions. Bust up the big banks. Reinstate a modernized version of Glass-Steagall. And when a “job creator” invests in financial assets instead of the real economy, the State gets to take their kids. If it’s a gov bond and you then complain about the nat’l debt? FEMA camps. Oh, and jail bankers.

    Then there is trade policy that’s only favored the professional class who get the benefit of cheap, plastic crap from China without having to sacrifice good-paying jobs and employment. For doctors, lawyers, dentists, bankers…tenured ECONOMISTS: import equally qualified professionals from overseas at one third the going price. And for the MMT economists, I have a very specific proposal just for them: cheap, state jobs for all(!!!)

    To help the poor: R-e-d-i-s-t-r-i-b-u-t-e. From the top to the bottom.

    Labor, while underpaid, has also been grossly overpaying for basics like healthcare, child care, housing, education, and transportation for decades now. MOAR money isn’t going to help.

    But that’s not all: I also want a debt jubilee for households which will force losses on creditors. There are already too many financial claims on the economy that can’t be realized. The underlying cash flows just aren’t there. Fix it. Or the State takes your kids.

    So excuse me while I throw up a little in my mouth when I think about “pump-priming” to “manage demand”. That worked. In 1950, under a completely different political (non-globalized) economy and energy constraints. Which very well may be the same as what Ian is saying here and in other posts, but traditional Keynesian demand stimulus in 2015 “under the right conditions” is not a minor detail. It requires a fundamental — some would even say radical — overhaul of the economy. And I’m moderately confident Keynes would agree.


  11. Greg T


    All good points. The key is how to get there. Keynes is as relevant now as he was in the 30s. Without a political force in place, however, Keynes’ theories are just academic scribbling. We only got the New Deal because labor movements combined with a vibrant Communist /Socialist Party demanded it.

    Without the imposition of political force, the organized rich just do what they want. No appeal to the public interest will sway them. They see only one interest; their own.

  12. Monster from the Id

    I agree with most of what Trixie said, except for the vindictive stuff. If that stuff was meant as a joke, I don’t find it funny.

  13. V. Arnold

    March 10, 2015…

    …seems to be the only one who even touched on debt. Americans and I think many other countries; both European and Asian, have bought the snake oil: Debt is good/necessary for a healthy economy, or some such nonsense! Common sense is MIA.
    Over the years and some very tough lessons, I think I know debt; its effects and consequences.
    What people need are qualified financial teachers explaining the evils of debt. Debt is NEVER good. That’s a fact.
    Debt is tantamount to slavery and the real root of the present crisis.
    David Graeber’s book, Debt, the First 5,000 Years is gold. It’s not what I expected, it’s far more and way beyond anything I knew before regarding debt. Think about it; 5,000 years?
    As Salomon said; There is nothing new under the sun.
    Educate yourselves as to what debt is in fact.
    Being debt free is liberating…

    I’ve been in an Asian country for more than 12 years and watched with sadness as they have bought the snake oil with disastrous results. Record auto repossessions and bankruptcies. The bankruptcies go on a black list relegating people to loan sharks and mafia. Many ruined lives.
    Those who can, wake up and act; get rid of debt anyway you can. Only freedom awaits.

  14. V. Arnold

    Monster from the Id
    March 10, 2015
    I agree with most of what Trixie said, except for the vindictive stuff. If that stuff was meant as a joke, I don’t find it funny.
    You don’t find it funny? Really? I think it’s hilarious. Wry humor at its best.
    You’ve been a witness to the biggest financial heist in history.
    There must be retributions or things will never be aright…

  15. johnm

    Create a peoples fiat bank, anyone who’s been a citizen for 18 years can draw against their account at a subsistence + rate, thereby accumulating debt. Plus if they have any debts that are not in default they can draw down sufficent to clear them, more debt. The rate of interest on any of this new debt would be inflation +.5%. If you draw on this facility you agree to pay 20% of any further income as tax, if you use this money in any way you must pay a transaction tax of 5% on all transactions. Scarce resources who’s use needs to be curtailed would be taxed at 20% on every transaction from the point of entry into the economy through to the end use. Tax all wealth, beyond say the average home price plus a sum which would generate an income similar to subsistence+ [as above] at inflation+.5%. Tax every layer of ownership. Use the tax collected to declare occasional debt jubillees wiping an equal amount of debt from every account. My 2c

  16. I certainly agree that giving money to rich people is not Keynesian, but giving money to “ordinary” people, while Keynesian, is merely going to create prosperity in other countries and increase our trade deficit, and will not do much for real prosperity here at home. Not until we solve the problems created by globalization.

    Lisa’s plan to “use taxes to channel the spending into areas that would not be inflationary,” has a lot of merit, but in general the use of taxes to direct social policy strikes a nerve with me. That doesn’t mean that I think it shouldn’t be done, but government tends to get carried away with such things, and it makes me nervous.

    As does “corporate taxes should be high” for all the reasons she gives. I believe that corporate taxes should be zero, but before you jump down my throat, I believe all corporations should be Subchapter S, in which all profit is distribtued to owners, no matter how many there are, so that there are no corporate profits to be taxed. That distributed profit should be taxed as ordinary income.

    What does profit even mean to a corporation anyway? The concept is absurd. It should be allowed some “retained earnings” against future contigencies, but the concept of a peice of paper making a profit is nonsensical.

  17. Ian Welsh

    Keynes wanted limits on how much of a trade deficit or a trade surplus any country could run. He was overruled by the Americans, who were massive exporters at the time.

  18. Monster from the Id

    V. Arnold: If retributions are necessary to establish a less unjust society, forget it.

    Nothing this world has to offer me under a less unjust society is worth the risk to my immortal soul.

    I turn 52 in May, and I have sired no children and never will. My primary concern is getting along as best I can while getting my ducks in a row for eternity.

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