Why do Keynesians Think More Spending will Stimulate the Economy?

By Stephanie Kelton

My Twitter followers are constantly asking me if I think more spending would really help the economy recover. I understand their skepticism. Many are probably struggling with high debt levels, and the last thing they want is some economist urging them to rack up more debt for the good of the economy. (Bad advice, indeed.) Others have heard President Obama talk about putting Americans back to work by investing in our nation’s infrastructure, educational system, energy future, etc., but many aren’t sure if the “stimulus even worked“, so they, too, wonder if more spending is really the right way to grow the economy. Well, here’s the answer.

Spending isn’t the just the right way to grow the economy, it’s the only way.

After all, what is “the economy”? For most economists, it’s a simple number. We use a country’s Gross Domestic Product (GDP) to measure its “economy.” So where does this GDP come from?

There are different ways to calculate GDP, but each method is designed to yield the same result. Let’s look at the most popular method — the one based on expenditure. GDP basically measures the total amount of spending (at market prices) on newly-produced goods and services (by their end users). In other words, GDP measure how much money we spend.

Who’s “we”? All of us. You and I belong to the household sector, and together with our friends and neighbors, our Consumption Spending normally accounts for about 70 percent of the expenditure that comprises our GDP (go team!). The business sector is important too, because that’s where Investment Spending comes from — the factories and office buildings most of us work in and the computers and machinery we use to make things. State, local and federal Government Spending also gets counted in GDP because they pay salaries, order supplies, buy aircraft carriers, etc. Finally, there are the things we import from foreign producers (European vacations, business travel, a foreign-made automobile) and the things we export to foreign consumers, businesses and governments. On balance, our Net Exports (Exports – Imports) are another potential source of GDP.

So how do we “grow the economy”? By increasing our GDP. And how do we do that? By increasing one or some combination of the four components of GDP:

1. Consumption Spending
2. Investment Spending
3. Government Spending
4. Net Exports

Without an increase in one (or some combination) of these components of total spending, GDP cannot increase.

(click image to enlarge)

Now for the hard part.

MULTIPLE CHOICE: Who is in a position to lead us out of this weak recovery?

a.) Household Sector (currently deleveraging – i.e. paying down debt)
b.) Business Sector (hesitant despite low borrowing costs and mountains of cash)
c.) Government Sector
1. State/Local (still struggling with shortfalls)
2. Federal (currency issuer that can spend more when others cannot/will not)
d.) Foreign Sector (China, India, Brazil, Eurozone, Russia, UK)

If you agree with me, then I’ll c.) 2. it that you become an honorary owl.

53 responses to “Why do Keynesians Think More Spending will Stimulate the Economy?

  1. John O'Connell

    To the question you asked, I agree. But with the 70% piece going backward, it is hardly reasonable for the 20% piece to take up all of the slack. Some individuals in the household sector are not deleveraging, and so they must have more (net — after tax) income, in order that their spending causes the bussiness sector to come back to life. Eliminating FICA would put money in the hands of those most likely to spend, in a relatively general and fair way.

    But having said that, now is a very opportune time for government to catch up on things it has been neglecting, like infrastructure. Issuing $500 per capita to each state government would enable that, as the states and local governments are mostly the ones who need to do the work, and have been cutting back during the crunch.

    • I think it actually is reasonable. The draw down on the part of the 70% isn’t a disappearance. Government could literally close the gap.

      Now, getting GDP back to trend would be a bit harder…

      • John O'Connell

        I forget if it was $7T or $70T, but the amount of wealth lost in the bursting of the housing bubble is far greater than any reasonable amount of government deficit, even over many years. That’s the minimum additional private sector income required to reduce the private sector’s desire to deleverage, and you must add to that the normal deficit required to offset normal levels of savings and net imports. The whole federal government spending, even including the current abnormal levels of “stimulus”, is less than $4T a year. I’m not sure we have enough imagination to think of another $7T of stuff the Federal government could buy in one year, nor is there $7T unused capacity in the economy to produce that stuff.

        Yes, government is the only one in position to do anything, but it has to be done by giving money to other sectors, not by government trying to consume things that aren’t there.

  2. Well said, Stephanie! I think you’re in agreement with two other Keynesians:

    “At a time when the private sector is engaged in a collective effort to spend less, public policy should act as a stabilizing force, attempting to sustain spending.” – Richard Layard and Paul Krugman

  3. William Waller

    Stephanie, I agree.

    However, we need to be more specific. The government can spend a great deal of money and accomplish nothing. If no employment is generated by government spending, if no infrastructure is built or repaired. If consumers and students are not helped out with debt and mortgages, if education funding is not restored, if the government spending simply provides more money to replenish the coffers of mismanaged financial institutions or military adventures we will not be better off.

    Moreover, the governments money should be spent to move in the direction we want our economy to move towards, a high-employment in good work, environmentally sustainable, humane society. The government should surely spend now. But we don’t need another misguided stimulus package where terrible programs and purposes must be funded in order to get any stimulus package out of an intransigent Congress.

    • Bill,

      Agreed. We are, of course, on the same side here. The goal is not ‘growth for the sake of growth’. Projects need to serve the public purpose (whether “shovel ready” or not). However, even a bridge to nowhere creates income for those that supply materials and labor for those projects, adding directly and indirectly to GDP. Tax cuts, in and of themselves, stimulate nothing. GDP rises only if/when the beneficiaries of those tax cuts spend a portion of the income they are permitted to keep. So you are right — one needs to be much more specific. As you probably know, we (MMTers) have long advocated a full payroll tax holiday, which puts income in the hands of those most likely to (a) deleverage and (b) spend. BOTH need to happen. I’ve laid out my program for recovery (Twelve-steps) many times. This post was simply designed to make the point that spending drives economic activity.

    • Right on. It is pretty depressing to look at our current political environment and realize just how far away we are from this becoming a reality. Not only is there no stimulus on the horizon, we’re actually staring down the barrel of spending cuts and possible tax increases. What a backwards world we live in…

  4. Once the federal government starts spending the 70% start to follow. That happens because the government expenditure is in the private sector whether it be on infrastructure or on increased social security benefits.
    When the GFC struck the Australian Government handed all benefit recipients $900 just before Christmas and launched a school improvement capital improvement program with new libraries etc. It also subsidized a home insulation scheme but that was largely ruined by fly by night installers doing inferior work. That was hardly the federal government’s fault as that scheme was poorly supervised by state governments. The state governments sometimes didn’t do a good job on the schools building program but the employment and economy benefits still were substantial. Even money ripped out of the system by rogues still provided some benefit when they spent their ill gotten gains. It was just that society did not get quite all the infrastructure benefits that they were entitled to expect from the federal government programs.

  5. What you say is obviously correct, but doesn’t answer the question we all really need to be asking: How can we most effectively return the economy to healthy, sustainable long-term growth?

    From that point of view, some kinds of spending (e.g. building “bridges to nowhere”) do nothing to help and others (wars of choice) do actual harm. To take an extreme example, for a time a society could give everyone food to dig holes in the ground and fill them back up – but then when existing stores of food run out there will be nothing for anyone to eat and the economy will collapse.

    I am skeptical of claims that we need to spend lots of money on all sorts of public infrastructure. If we already have an adequate transportation system, defined as one that does not significantly constrain economic activity, then expanding it or polishing it up will not be the best use of our resources.

    I personally am convinced the basic problem with the U.S. economy today, and quite possibly with the world economy as well, is too much wealth inequality. When people become wealthy they spend less of their money, both because they need a smaller percentage and because sitting on it provides two things of value: security and power.

    Whenever business owners and leaders are asked what they need these days, it seems their answer is, “more customers.” Not more loans or lower interest rates.

    • John O'Connell


      Having spent the past several months driving my RV around this great land, I can say without doubt that there are several sections of major highways that are significantly constraining economic activity. What is more important, though, are the water systems in many major cities, which are starting to fail, having reached the end of their useful lives.

      Recession or recovery, these things ought to be done. Now is just a little bit bit better time to start.

      • I don’t know which roads you are talking about, of course. But a road that “significantly constrains economic activity” is one that actually results in noticeably fewer goods and services being sold than would otherwise be the case.

        In today’s job market, traffic congestion causing overlong commutes probably has negligible impact on the number of people willing to do those commutes to keep their jobs. Unpleasantly potholed roads may even have a positive impact on GDP (though not on wealth), as more vehicle repairs might be needed. But it would take an extremely bad road to cause the price of trucked goods to be increased so much that sales would be noticeably reduced.

        As for water systems, until they start causing people to get sick and need medical care and time off work, I don’t see them as major constrainers of the economy.

        If our government weren’t already so deep in debt, I’d say the palliative effect on human suffering plus the desirability of better water systems (and roads) would make government spending on these things worthwhile. But there are big risks to piling on too much debt, so unfortunately I think our government today needs to be careful with its spending.

        • John O'Connell

          What if the road is overused, so that it takes too long for goods to get to market, and so they don’t go to market, or don’t get there before they spoil? Or if the potholes raise the maintenance and repair costs so much that the trucks don’t go there, or if the speed is so slow that the truckers cannot make a profit delivering them?

          And you can’t always tell, at least not right away, what the water is doing to you. Some systems already exceed limits of some contaminants, and we only recently figured out that it was lead that had been injuring people for decades. Who knows what the effects will be of the exotic stuff in our water today? Anyway, I was thinking more of leaks, which are chronic in many systems, and broken pipes that cause flooding and systems to be shut down completely. Because they’re old.

          But, I see your problem. What risks, exactly, are you talking about of taking on too much debt? Will our interest rates stay at zero forever, like Japan, if our debt gets to 200% like Japan? You’re not comparing the US government, which is monetarily sovereign like Japan, to non-monetarily sovereign governments like California or Greece, are you?

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  7. Alex Seferian


    My view is that your comments are spot on. “Bridges to nowhere” will increase GDP indeed, and conveying that straight forward message it is stated was the original post’s objective. Everybody in agreement there. However, isolating that message may confuse some or mislead them in terms of what I think MMT actually advocates. “Unproductive” investments will result in slower GDP growth by definition almost. In addition, “unproductive” investments will tend to more easily impact inflation, relative to “productive” investments, and inflation is what MMTers indicate has to be monitored when increasing Government Spending.

    Also, to the extent increases in Government Spending, or reductions in Taxes, are channeled relatively “unproductively” in an economy, chances are that the country in question will lose out over time compared to other, more efficient let’s say, nations (with dire consequences in the long run) (Spain versus Germany comes to mind, although admitedly that is a simplification of what is hapening over there).

    Last but not least, I would add that another way to increase GDP would be for the 70% (households) to benefit from some sort of a debt reduction initiative. Some post-Keynesians suggest a “debt jubillee” (Steve Keen) and it would seem that they make a valid point when they highlight that part of the current problems in the western world have to do with speculative type loans that banks irresponsibly made out. When banks lend without adhering to proper credit standards, and when they do so to earn a fast buck, they should stand up to the consequences and bite the bullet. Deleveraging households would make it easier for demand to pick up from this sector. Doing so (easier said than done) could also help avoid a slow and maybe drawn out (decades long?) recovery… the sort of recover that perhaps would come about if only the Government sector were to come to the economy’s rescue.

    • All this is true. But in a democracy, a good deal of government infrastructure spending is bound to happen in a haphazard and not rigorously organized way. Representatives go to Congress, fight and trade to get their own district’s spending priorities included in an omnibus bill, and then pass the bill. It’s a messy process, but a lot of worthwhile things get done.

      I really think the “bridge to nowhere” business is very much overrated. Most districts in this country are not affluent utopias that are so perfect that the only thing they can think of spending money on are wasteful boondoggles. Rather, they have long lists of desired projects they would like to get done, and that are mostly all worth doing, and only a small portion of which they will be able to fund.

  8. “d.) Foreign Sector (China, India, Brazil, Eurozone, Russia, UK)”

    Just stating it like that generates a huge perception problem. It imbibes the Foreign Sector with ‘Deus Ex Machina’ capabilities – which is how neo-classical economists like to portray it.

    The Foreign sector is just an aggregate of other countries like yours and currently they are all in the same boat as yours, ie:

    “a.) Household Sector (currently deleveraging – i.e. paying down debt)
    b.) Business Sector (hesitant despite low borrowing costs and mountains of cash)
    c.) Government Sector
    1. State/Local (still struggling with shortfalls)
    2. Federal (currency issuer that can spend more when others cannot/will not)”

    So if you’re relying on the ‘Deus Ex Machina’ sector to sort you out then what you are hoping for is a Foreign Government Aid.

    Good luck with that.

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  10. Dear Stephanie,

    Thanks for the great writing! Well said! Totally effective (except the wisecrack at the end about owls, which will put off some of the people you want to reach: it has taken more than a decade for Krugman to learn to curb his sense of humor!).

    There is another very simple way to say the same thing.
    1) Large numbers of machines and people are not working.
    2) It costs the Federal government almost nothing to borrow money to put these machines and people back to work.
    3) The taxes generated by the activity of such people will pay off the borrowing in a few years.
    4) The activity of the presently unemployed machines and people will produce some useful result.
    5) The activity of the presently unemployed people is need for them on human, psychological, social, and moral grounds.

    Even simpler: the market says it costs almost nothing for the government to borrow, so the government should do what any good business would do, borrow!

    As ever
    Bob Eisenberg

    • Bob, if the choice is just between taxing and borrowing – as it is on the conventional non-MMT picture of public financing – then it seems to me that taxing rich people is probably the better way to go for the public, even at near-zero borrowing costs. Consider the two options:

      1. We borrow $200 billion from rich people at .25% interest. We spend the money and generate some valuable national output that benefits the general public to the amount of X dollars. We then tax an additional $200.25 billion from the general public, and use it to pay back the rich people. Scorecard:

      Rich people: + $250 million
      General public: + $X – $250 million

      2. We tax $200 billion from rich people. We spend the money and generate some valuable national output that benefits the general public to the amount of X dollars. We don’t raise taxes on the general public. Scorecard:

      Rich people: – $250 billion
      General public: + $X

      I’m assuming rich people are the main lenders to the US government. Of course, there is some overlap between rich people and the general public, but still I think the general public probably does better by taxing the rich than it does by borrowing from the rich.

      • Dear Dan

        Thanks for your comment. Sadly, I am not economist enough to agree or disagree intelligently with your careful analysis.

        My point was to show how simply the Keynesian argument could be made. My point was to provide an argument that even Andrew Jackson might have understood, if he were capable of rational discussion on the subject of money at all.

        Thanks again
        As ever

        • Bob and Dan, If stimulus is required, why even bother with tax or borrowing? I.e. why not just have the government / central bank machine print money and spend it? And conversely, if inflation looms, they can do the opposite: raise taxes and “unprint” money.

          I.e. if the object of the exercise is stimulus, then it’s barking mad to raise taxes or borrow, because both of the latter have an anti-stimulatory or “deflationary” effect. It’s a bit like chucking dirt all over your car before cleaning it.

          Indeed, the latter “print and spend” policy is in effect what has happened big time as a result of QE. Of course the relevant chunks of government debt are in theory still there: in the hands of the Fed. But government debt held by a central bank is just meaningless. It’s debt owed by one part of the government machine to another. I.e. those debts might as well be torn up.

  11. The only way that spending will help is when money is used to achieve it. But goods are so expensive that the little available money soon gets spent and what is being held back will soon be spent too. The problem is not woth the need to spend but the inclination and that is slowed due to the high cost of everything. This cost comes from the returns necessary on the 3 factors of production (Adam Smith 1767 Wealth of Nations) Land, Labor and Capital returning rent, wages and interest. Are we charging too much for our labor or for our use of durable capital goods in production? No, it is access to the land that is costing us too much and which is tightly withheld by landlords and speculators in land values.

    What starts as a money problem actually resolves itself into a wasted opportunities one where the development lands on the outside of communities are being held back and their prices raised by a few selfish speculators in its value. By taxing land values instead of production (income tax, purchase tax and capital gains tax) the speculation in land values will cease, production costs become lower allowing entrepreneurs a greater chance to build up their businesses, employment to grow and poverty to shrink.

  12. Excellent lesson, Professor! I want to live in your world.
    If I understand your lesson correctly, we don’t even need the currency producer to spend the money it produces. We can all vote to have the currency producer send us the currency it produces so that we can spend it. If we spent all the currency that the currency producer sends us, that would increase GDP too, right? That would be great. I could stay at home all day and eat bon bons while listening to cheerful reports about our ever rising GDP. Sign me up!
    But I have a question. You mention three ways to calculate GDP. I thought I heard somewhere that one way involves summing up all production, and I thought I heard that all three ways are supposed to total to the same number. But if that’s the case, then all that spending I’m doing while sitting home eating bon bons also has to equal production. And I’m not producting anything, so where does all that production come from? Do we produce stuff when we spend? I don’t get it. Which comes first? Oh, it’s all too complicated. Just have the currency producer send me some currency so I can buy my bon bons. I’m sure someone will make them for me if I have the currency to buy them.

    • John O'Connell

      Dear Santa,

      I’d like a new bicycle, … oh, maybe that’s not really you.

      Spending comes first, though. It’s hard to tell because it’s a cycle. Your spending is my income, which I get because of what I produce. If you’re not buying, I’ll stop producing until I can sell what I already have in inventory. If you spend more than last time around, I’ll hire more people and produce more, and those new hires will spend their new income, and … do you get it now?

    • If you are spending money to purchase bon-bons, then a bon-bon producer has sold some bon-bons that wouldn’t have been sold otherwise. Given that companies are not carrying huge excess inventories, then the increase in the demand for bon-bons results in an increase in the production of bon-bons and an increase in the employment of bon-bon makers.

      In principle, we can distribute newly created money to people in exchange for no additional work on their part. If our economy were at full capacity, then such a distribution would just dilute the purchasing power of dollars already in existence by causing inflation, and would generate no additional production or purchases. But since the economy is not at full capacity, we can exploit the short-term non-neutrality of money and stimulate more demand and production simply by creating money and distributing it.

      However, a better way to get this ball rolling would be to use new money to hire unemployed people directly to do something useful for their communities and the nation. In that case, the public gets some socially useful output from the people to whom the money is distributed; and we also preserve the ideal of a social contract according to which benefits come to people from other in exchange for useful work, not for nothing.

      If we are still worried that more consumption and production of bon-bons is not exactly what we need, and don’t trust the discretion of consumers to use their new purchasing power in the most socially optimal ways, then we should deliberate in our legislatures about the best things to spend the money as a public. Rather than giving people money and hoping they use it to demand useful things, the public can directly purchase the things its believes are valuable, and deliver that value to people after it is produced.

      We just need to remember that while we have delegated much of our government’s power to create new money to the central bank, the central bank operates through the banking channel, and does not have the kinds of tools and institutional authorities that are needed to distribute that money broadly throughout the population, much less to hire people for doing useful work. So if we want to use the government’s inherent monetary authority to get the job done, we need Congress to wield that monetary authority itself.

  13. Wow, sounds like Greece and Spain have the solution now–their governments should be spending/printing more money. And FDR surely showed us the way too–check out what GDP did once he increased government spending in the 1930’s–GDP soared!! And you know what, our country was founded on the basis of government spending–shucks–that’s what made us great! Obama knows this–its just those darn Republicas and George Bush who keep us from spending more………..and if only Bernanke would print more money we’d all be rolling in dough! YeeeeHaaah!!!!

    • John O'Connell


      You’re obviously new here. Keep reading, until you see the explanation of why Greece and Spain cannot do what the US and Japan can do. Look for the phrase “Monetary Sovereignty”.

      Look for 1930’s history, too. The economy did expand until 1937, when deficits were greatly reduced in an effort to balance the budget, and a new recession began. It ended only with the deficits due to increased spending on the war effort.

      I agree with you about Obama. It turns out about 63% of Americans think that hard work and skill are more important to success than luck, but the rest of the world thinks quite differently. Eastern cultures believe in fatalism, that there is virtually nothing you can do to change your own life, it is all pre-determined. A majority of Europeans say, like Obama, that luck is more important than hard work and skill. By coincidence, yesterday after watching some of the speeches at the convention the night before, I went to Greenfield Village at The Henry Ford. Ford hung around with Thomas Edison a lot, and both of them were very much “I built it” types. I even heard the phrase from other people visiting there, during discussions of their lives and achievements. This has nothing to do with macroeconomic policy, though. Keep reading, and never stop learning. Like Ford and Edison.

  14. @Santa

    Beginnings are such fragile moments. Before you wax too sarcastic, consider: Professor Kelton really *does* have a PhD in economics. That doesn’t make her argument correct, of course, but unless your resume out-ranks hers, it’s something you should give a little weight to.

    As to the substance, begin with this: when the government sends out checks, or credits bank accounts, that *is* spending. Look again at what you wrote. How did you miss a point so basic? Do you still feel superior to Dr. Kelton and the other comment-writers here?

    Second, the U.S. government does this all the time, under both Democratic and Republican administrations. George W. Bush mailed me a $350 check in 2002 as part of a bi-partisan effort to ease the 2000 – 2001 recession. Which it did. The 2009 stimulus bill gave me (and you too, if you pay taxes) a tax credit that also assisted the current anemic recovery. This used to be a completely routine component of fiscal policy until the Party of Limbaugh found ways to convince guys like you that your real enemies are the Keynesians.

    I, for one, am giving you the benefit of the doubt here. I give you credit for thinking, for trying, and I’ll even throw in a couple of style points for your dry sardonic wit. But do yourself a favor – really think about what is written here. There are clear, accessible answers to all your doubts and fears on this site. If you can shake off your prejudices long enough to see these answers, it will change the way you think about everything.

    Good luck.

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  16. b.) would be correct if there wasn’t so much uncertainty out there. /s

  17. First of all, even if the loss of “wealth”, that is, using the current price of houses and the apparant equity created to define household “wealth”, has been anywhere from $7 T to $70 T as you suggest, and has created some kind of aggregate desire by households to “delever”: 1) that doesn’t mean that the need to delever measured in dollars is equal to the amount of the apparant loss of “wealth”; and 2), more importantly, that doesn’t indicate just what is the shortfall in household spending relative to before, at least I don’t think that it does. The government sector wouldn’t have to make up $7 T or something to counterbalance the contraction in household spending, but more probably some small fraction of that. People are still going to the grocery store and even to Best Buy. So, at least as far as I can see, your argument against the other guy and the author of the post doesn’t hold, at least not the way you’ve presented it.

    But I’m interested in sector “d)” of the multiple choice. That is, “net exports”. Since we import now much more than we export, and have for many years, has that not made our net exports run negative for quite a long period now? Does anyone else think that that’s the real source of our recently-chronicly-stale-economy-problem? If the government or the private sector decide suddenly to throw money around drunkenly that should boost the economy nicely… FOR OUR “TRADING PARTNERS”!

    A better somewhat longer term solution for us is to forget GATT and those other acronymic trade agreements that have drained our economy and to raise tariffs against any economy that refuses to pay their workers at least somewhat commensurate to ours, ie, they have to be given the means to consume, and also adhere to our environmental standards. We have means more than most to be economically self sufficient. The other’s have to play ball according to our rules. We’re simply foolish not to make them. We’ve been killing ourselves.

    • John O'Connell

      Maybe it’s not exact, but if my house is now underwater, I’m probably not going to go on any spending spree, until I can pay down the mortgage (deleverage) to where I have some equity again. People more generally will want to save up until they have at least what they had before. Again, maybe not exactly, but it’s a good estimated starting point, and it won’t happen all at once, so while it is happening private spending will be constrained. Government can’t be expected to make it up all at once.

      Maybe an example: my house was 100% financed, and lost $100K in the bursting of the bubble. I’m still employed, making $100K a year. Instead of saving maybe $10K, I’ve decided to save $20K until I get my mortgage back to even. That’s $10K of spending lost each year for 10 years. (I’m still going to the grocery store, maybe not so much to Best Buy, but not to the Cadillac dealer every 3 years anymore, maybe every 6 years.) Government has to supply $10K of deficit per year to offset my increased saving (reduced spending), but it should not try to supply $100K of deficit for me and everyone like me. The output gap is not that large.

      As for trade, imports are a benefit to us, exports a cost. As long as the world wants to accumulate our dollars, we should gladly accumulate the fruits of their labor. Since we can create dollars for nothing, it’s almost like having them work for us, for nothing. In the sectoral balance equation, every time China sends us $1 of ipads (and their government buys $1 of treasury bills), our government should reduce our taxes by $1.

      Restricting trade is not only bad for us as net importers, it invites retaliation against our exports, raises costs for both sides, and good trade relationships lead to good political relationships, and make war less likely.

  18. You can’t spend the same sum twice! If the government chooses to reduce taxation and according to the Kenysisn theory, to provide households with more spending-money, then the government has less to invest in the infrastructure. If it invests in the infra structure (also according to Keynes) then there is less for taxed householders to use for consumables. The next time the money goes round the same problem continues to exist and there is no pump-priming possible, its either one or the other, not both.
    So I find that it is not money that is the basic problem but lack of opportuniuty to produce goods without them costing too much due to the 3 returns on this process, ground-rent, wages and interest. Of these 3 and with the amount of raised cost due to speculation in land values, we find ourselves being limited in progress by the speculator in land values who ho;ld what he owns unused and makes the rest in use more costly. Tax land values not people, tax takings not makings!

    • John O'Connell


      Reducing taxes doesn’t reduce what the government “has” to invest in infrastructure. When taxes are reduced and spending left alone, the number of dollars increases, so that the “same” sum is not spent twice. Spending by government creates dollars, taxing destroys them.

      Land values now are much less than 4 years ago. If it is high land values holding us back, why is production lower now, not higher? It is not high land value reducing production, it is low spending. Producers only make what they think they can sell, and with sales low they are cutting back, not growing.

  19. “Wow, sounds like Greece and Spain have the solution now–their governments should be spending/printing more money. And FDR surely showed us the way too–check out what GDP did once he increased government spending in the 1930′s–GDP soared!! ”

    Gee, Dan, you really should do a little fact checking before you attempt sarcasm.

    Spain and Greece are constrained because their debt is essentially denominated in a foreign currency. They are not a sovereign issuer of currency. And, yes, FDR’s programs did give a huge boost to the economy in the 1930’s. And the attempt to balance the federal budget in 1937 was disastrous. But, hey, this is the Internet. You’re entitles to your opinions even though you have, at best, a shaky command of facts.

  20. Thanks for this Dr. Kelton. Love the language and tone. For a non-econ reader, I think this is compelling.

  21. Whats really interesting is that the deficit hawks are right about debt but wrong about which one, (they inevitably focus on public debt) additionally when they talk about investment they seem to be worried about what a rich “PERSON” would do, hence their focus on tax cuts for the rich, while never talking about the largest source of investment, businesses. Businesses are poised to invest at record levels, if you consider that their cash and profit levels are as high as ever, but, businesses being all about preparing for customers, have noticed that there arent many of those around so thy see no need to invest. Once again it comes down to getting money in the hands of the workers not the owners.

  22. I have to wonder, though, Stephanie. In the Keynesian world, the essential claim that you have to make in order to remain consistent is that people consume so that others may produce. This is in direct conflict of the typical economist, who says that people produce so that they can consume and are led, as if by an invisible hand, to those activities where they are most productive so that they can also be the most consumptive. What defines “consumption” is, of course, up to the individual person who is choosing. Some people like to consume love or leisure, others like to consume fancy cars and booze. The point, however, is that none of them would say that they are consuming these things so as to enable others to produce. They’re consuming because they’ve earned the right to.

    I’d love to hear you comments on this, when you get a chance.

  23. Say’s Law of markets as explained by David Ricardo suggestes that supply creates its own demand. In othere words once an item of goods exists, it is offered for sale. Then the price at which its sale takes place is not directly going to affect this production, but it will subsequently result in competition for other entrepreneurs to produce the same item at lower cost. This is not a chicken and egg situation.

  24. Instead of talk about spending, you could explain what effect government spending has on wealth.

    Economy is so weak only because consumers have become too poor to consume. That is because they lost 8 trillion in wealth as house price bubble deflated. The government can simply increase wealth of it’s citizens by taking away from them less in taxes than it gives to them in spending. It’s called deficit spending. And you probably should explain that no, government does not borrow this difference out of some existing fixed pool of money. Deficit spending creates new money into the economy.

    This gets us away from territory of talking about spending. Spending is contrasted with saving, and latter is tought to be good, resposible activity, preparing for future, while former is the opposite. Whenever people hear keynesians talking about spending creating jobs they do not understand that spending is not unsustainable in nature. Whereas if you talk about government increasing wealth of its citizens, there is not this moralistic opposition. I think people would generally agree that more wealth is good thing.

    And you could talk about how every debt has as its conterparty credit that is wealth to its holder. Like shadow or mirror image, reflection. Government has debt = non-government sector has an asset.

    Just try it. People will understand because most have no pre-conceived idea how the deficit spending works. Even new keynesians do not seem to understand that deficit spending increases wealth of the non-government sector, so it would be useful discussion to have with academic audiance as well. This argument is much more persuasive than talking about spending I think.

    • Dean Baker for example explains this economic slump by “housing wealth effect” in his book end of loser liberalism, available online: http://www.deanbaker.net/images/stories/documents/End-of-Loser-Liberalism.pdf

      Consumption in an economy must be function of net wealth of consumers (assets – liabilities). When someone goes into debt to build a house, even though new financial liabilities are created as much as new financial assets and they net to zero, value of the newly build house does not net to zero and there is increase in the net wealth of the economy. I think this is one of the fundamental driving forces of the economy and explains constantly raising aggregate demand as private debt levels raise.

      Is there any discussion among post-keynesians about this phenomena? Please share your knowledge about the economy with other economist this is too important stuff to keep hiding in an intellectual smugness.

      • That is a good point. What you are saying is that when the number of mortgages grow and more money is being owed, it has already created the effect of greater money circulation due to the number of house-builders etc. This suggests to my mind that the economic crisis is not due to low rates of money circulation but lack of opportunity for more housing construction, due to low demand associated with high prices.

        • John O'Connell

          Housing is certainly one of the hardest-hit sectors of the economy, but the problem is not so much low demand as excess supply. Home building will not expand significantly in many areas until the existing homes are again occupied. They are for sale at fairly low prices, not high. about the same price level as in 2000, I think I saw, but in any case much lower than at the peak.

          Although, I guess if you compare the demand today with the demand when there were speculators buying up everything in sight, you could say there is lower demand. I’m not sure bringing back the speculators is the way to fix the problem, though.

  25. Spending, “bridges to nowhere” contributing to GDP – this part is logical.So it seems like like both dotcom and real estate bubbles were fully compliant with that logic, at least during they growth period.

    But there’s the other side of the balance – to spend you need to have the money to spend. And if the money is borrowed, it has to be returned. So if the money is just consumed (“bridges to nowhere”) instead of being invested in real productivity growth, it will be nothing more than a Ponzi scheme.

    • John O'Connell

      “to spend you need to have the money to spend”

      True for a household, but not for a monetarily sovereign government.

      • That’s Keynesian thinking and its simply not true. If for no other reason, that soon the national debt will be so big that the taxpayer won’t be able to cover its interest! There is no justification for a government to be unable to pay its way.

        This knowledge became particularly true since 1879 when Henry George showed that the greatest source of government income (namely ground-rent) is being allowed to go to greedy land owners and speculators in this, the whole nation’s gift and bounty. The land also provides the greatest opportunity for progress when it is made equally available, and that anyone who occupies it is taking this opportunity away from the others. For this the land owner should return the opportunity that he/she is taking. It is this opportunity that is being withheld and squandered by the land owning speculators who confine the opportunities and drive up the cost of what land is being used. No wonder that the demand for goods is low. The exaggerated cost is due to the over-charge in ground-rent. And it will remain that way until the opportunity for land use is increased by incentive taxation of what the landlord unjustly confines.

        TAX LAND NOT PEOPLE; TAX TAKINGS NOT MAKINGS! (and to hell with keynesian theories)

        • David,

          Keynesian thinking is true. Ronald Reagan tripled the national debt and it led to the creation of nearly 20 million jobs. Deficit growth creates jobs. Deficit reduction destroys jobs. That is Keynesian thinking and it has been proven true by historical fact.

  26. Spot on Prof. Kelton – short and to the point and simple – that’s why it’s so hard to get this economic doctrine across to folks because they reject the element that the United States is a “currency issuer”, not just a common user – keep up the good work –

  27. Jerry Masinton

    Stephanie Kelton’s clear analysis tells the whole story. We’ve had years of bad-faith commentary by politicians and a few ultra-conservative economists who are ideologically committed to the position that government spending is bad and that government spending in a recession or depression will only make things worse. But, as she points out, spending is the only way to increase the GDP, and the government is the only sector right now that can do the job. Corporations have the money to spend, but basic self-interest prevents them from doing so. I don’t think that anyone can boil the matter down better than Stephanie Kelton has done.

    • It is no good to state the opposite of a previous opinion without explaining why this view applies. I claim that Keynesian Theory as portrayed by R.Hicks and others is incomplete. Since so much is missing from the complete picture of our social system these Keynesian ideas cannot be right. During the Regan Years the facts were that he increased taxation and the economy made good progress. I doubt if this proves anything, because when considering the “big picture” one man’s tax payment becomes another man’s income. Many other factors were not mentioned for this period of economic history– it is so easy to make the facts fit the theory in a case like this!
      And I am sure that not all of you are blind to the alternative that I claimed above, of taxing Land Values instead of incomes. Deliberate political blindness is scarcely a virtue on a blog like this which (like the orange colord fish) is seeking a new perspective and opposing the main-stream.

      • John O'Connell

        “one man’s tax payment becomes another man’s income”

        Not in MMT. Tax payments are a simple removal of money from the economy. It is destroyed. It is not income for anyone, and particularly not for the government, which needs no income.

        “During the Regan Years the facts were that he increased taxation and the economy made good progress.”

        It is true that some taxes were increased during the Reagan administrations. The biggest was the grand Social Security compromise very early on, which precipitated the 1982 recession. But the theme of Reagan’s tax policy was income tax rate reduction, and it was done twice in a large way both times. The other big economic policy theme was large increases in spending on defense, and despite the rhetoric of the time from both sides, no reduction in non-defense spending, and the combination of the 1983 tax rate cut and the increased spending was a bigger deficit that got the economy going. The increased economic activity resulted in increased tax receipts that overcame the effects of the rate cuts, and tax revenues increased after that initial drop.

        So, “the fact” is that there were both rate reductions and revenue increases. To say that the causality flows from revenue increase to good economy is simply backward.

  28. If spending (money) is the only way to grow the economy, why do we have to spend borrowed money instead of earned money?
    If the Federal Government is really US, all the people, and owns and controls the flow of money 100% and also controls all banking 100%, it should earn all the compound interest.
    So, we the people are the lenders to the people and collect interest from the people and use the earnings to serve all the people.
    If we the people understand all that, then we need to eliminate all money and go and ask a wise man named Jacque Fresco what to do next, because we cannot play this game of infinite growing, using finite resources.

  29. The 30 prosperous years of the application of the theories of John Meynard Keynes (including spending on infrastructures) was possible because the economic system in this era was basically honest and had a social side that the actual profit based, fully corrupted neoliberal casino style privatization crazed crisis prone economy makes impossible. _____ Few solutions possible, like application of the Tobin tax on all market transactions to wreck wild speculation, use of the theories of the economist CliffordHughDouglas and his social credit system prohibiting privatized central banks like the actual Fed, etc… ___Read for more at – canobs.livejournal.com -and- webofdebt.com