The key rule to Keynesian economics is that "wealth" is fictional and can be created by the perception of wealth. To do this governments need a very specific measure inflation for economic growth. When the economy naturally contracts by lowering interest rates and expanding credit you can create the perception of increased wealth or at the very least the maintaining of previous wealth status.
The problem with this is that eventually the economy gets to the point that, if actual wealth production (manufacturing and exports) falls and the population uses credit and low interest rates for to long and at elevated levels, the credit lines exceed the ability to maintain and they collapse. This in turn creates a wave of credit contraction that will eventually collapse the economy.
The idea of Government spending is much the same.. when consumption power is decreased due to a contraction of credit or income the Government can make up the difference by pumping money into the economy via public works or liquid extensions to the populace ('stimulus checks or tax cuts') It's impossible for the Government to effect all aspects of the economy, but the belief is that if one sector expands you can create a domino of consumer inspired job creation. The downside? The vast majority of jobs are minimum wage low skill jobs. It should be noted that Keynesian economics do stop economies from collapsing entirely. If we used the Classical Economics Model (the opposite of Keynesian Economics) we would have collapsed, our government likely would have dissolved, and we would be the middle of a huge war. But Keynesian Economics have never been tested for this long in this kind of economy.. It's unlikely that without a massive alteration in the way the World economies deal with credit that we will survive.
Keynesian economics is not about creating wealth .. it's not about manufacturing or building or expanding the economy. It's about creating this illusion that even when the economy falters you can inflate your way into prosperity.
It's important to note that Keynesian Economics began after WWI and II in earnest.. the Federal Reserve system was our beginning of Keynesian ideas.. but after the Great Depression it was Classical Economics that saved us: Massive warfare that rebuilt the manufacturing base and killed off a portion of the population.
edit on 12/17/2011 by Rockpuck because: (no reason given)
