This article by Nancy Folbre discusses the merits of Keynesian economics today. The basic Keynes concept discussed is this.
A recession causes businesses to hoard cash and households to hoard cash because of economic uncertainty. Job losses result.
Keynes would certainly agree that current unemployment rates reflect a recession-induced shortfall in the demand for labor. The evidence for this claim has been deftly summarized by Paul Krugman, citing studies by the Economic Policy Institute and the Roosevelt Institute.
A Keynesian solution is that the government step with spending to kick start demand, filling the gap for the private sector, which then increases job growth. Businesses and households start spending. The resulting economic revenue then pays back the stimulus in spades.
Conservative economists like Robert Barro of Harvard University insist that increased government spending will have little positive effect, and that increased deficits will create bigger problems than they solve.
Let’s assume, for the moment, that Keynes was right in his 1920′s and 1930′s era, that the government stimulus as a kick start/gap filler is far better than letting the economy flounder without it.
Today, the government spending leaks overseas because of globalization combined with our trade deficit. So there is substantial “slippage” because the resulting demand is not for U.S. goods and services but for Chinese goods and services.
There is also job creation slippage. Because of capital mobility, the government spending can easily create jobs elsewhere, not here.
In today’s global economy, however, employers have less incentive to collaborate with workers than they once did. Multinational firms can easily relocate to low-wage, low-tax havens. With one click of a mouse, shareholders can move their capital out of the United States into mutual funds invested entirely in emerging markets, including China.
In other words, the cross-class coalition that supported strong state participation in the United States economy in the post-World War II has come undone.
A partial counter is to strengthen “Buy American” legislation so taxpayer spending stimulates demand in the U.S. We achieve the in-house stimulus effect through restrictions on the money, because the environment has changed. This reduces the payback slippage. It is not protectionist, it is simply smart investing. And dumb to do otherwise.
The Folbre article does not come to this solution that I just stated. She just says that Keynes would be disappointed that we did not do more stimulus. That solution does nothing to address the “leakage” and “slippage” issues.
She also states this contradictory thought:
If Keynes were around today, I think he would emphasize a supreme irony of Neoliberalism: No country has taken better advantage of free trade than China, with its controlled currency and strong industrial policies, including huge public investments in renewable energy technologies.
China taking advantage of “free trade”? Hardly. They take advantage, to be sure, but through mercantilism. A so-called throw-back policy, which just so happens to be dominant in the world today… even as our political and opinion leaders think free trade actually exists today.