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Keynesian Economics, Helping the US Economy

Keynesian philosophy states that in order to manage economic downturns, government

intervention in the economy is imperative. It was Keynesian Economic Philosophy that kept America out
of another depression during the Great Recession due to the fiscal and monetary stimulus (Seidman 32-
53, 22p). By examining the government’s need for spending money on welfare, cutting taxes, regulating
and monitoring the financial markets, and government spending on military, America sees how a
Keynesian approach is a necessity. The American Government needs to continue using the Keynesian
model in order to enhance the performance of the economy.
Keynesian Philosophy provides government assisted programs to those who qualify. One form of
assistance is Welfare. Welfare provides benefits and economic assistance to low or no income Americans.
With the dismal economy, there are now over 100 million people on welfare according to the Census
Bureau; and this doesn’t include those receiving Social Security or Medicare (GOPUSAStaff). Food
Stamps are one of many divisions of welfare. The food stamps program, also known as the
Supplementary Nutrition Assistance Program (SNAP), helps low or no income citizens buy food. There
are over 46 million people on SNAP as of June, 2012 (Luhby). That is more than one in seven Americans
and more than 25% of eligible Americans do not participate in the food stamps program. There are
millions of low-income seniors struggling to afford food and medicine. “Enrolling in SNAP can help ease
that struggle,” said Stacy Dean, vice president for food assistance policy at the left-learning Center in
Budget and Policy Priorities (Luhby). Local stores that accept food stamps, helps bring Federal dollars
into those communities benefiting the economy.
In addition, Keynesian economics believes inadequate spending, from both the government and
the private sector, results in a poor economy. In order to increase overall spending there needs to be
government fiscal stimulus by lowering taxes. When marginal tax rates are lowered, it gives incentives
for increased production, new businesses, and new jobs (Ferrara). Recent tax cuts failed to work because
the cuts involved temporary tax credits, not reduction of income tax rates, and a lot of people saved that
money instead of spending it and stimulating our economy. Tax cuts are not required to be paid back,
unlike loans, so the recipients will have more money to spend, resulting in economy stimulation.
The reduction of income tax rates imposed in 2001, because of the recession, affirms that cutting
income tax rates stimulated the economy by quickly ending the 2001 recession even with the impacts of
9/11. The government’s tax cuts were as follows: the top income tax rates by 11.6%, the second highest
rate by 8%, and cut the lower rates from 33% to 10% (Ferrara). For the next 73 months the economy trend
was expansion. 7.8 million new jobs were created over the next 4 years after the rate cuts were in effect
completely in 2003. Unemployment fell from 6% to 4.4%. Even with the 25% Capital Gains tax rate cut
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the Capital Gains tax revenues doubled by 2005 (Ferrara). By increasing disposable income, increases
consumer spending, results in increased GDP. The wealthy and the poor may both benefit when tax cuts
succeed in expanding economic growth.
Not only are tax cuts needed, but regulation of the financial sector is also needed. If the Great
Recession taught us anything about Wall Street and the banking sector, it was that they are very prone to
fraud and manipulation of markets including (but not limited to) high-risk securities and derivatives,
speculation, credit bubbles, and subprime mortgages, also known as high credit risk mortgage loans.
During the subprime mortgage crises, firms such as Freddie Mac and Fannie Mae gave too many
mortgages to people who were not able to pay them back. This inevitably led to a large number of
mortgage delinquencies. One in ten homeowners, with a subprime mortgage, was in foreclosure in the
final quarter of 2007. During the same period this was nearly ten times greater than the standard mortgage
(Moulton). Houses then started to lose their value making it nearly impossible for anyone to refinance.
Banks deceased loaning money around the entire world resulting in economic growth coming to a halt,
particularly in the United States and Europe. Had there been adequate regulations and limitations to the
subprime mortgages these sectors were engaging in, the effects would not have been as enormous and
probably could have been prevented. These too-big-to-fail firms are the ones that need the most
regulation. Alan Greenspan, a former Chairman of the Federal Reserve, emphasizes, “If they’re too-big-
to-fail, they’re too big” (qtd. in McKee). Failure of these institutions will create a domino effect. In order
to reduce the damage to these institutions there must be regulation and oversight in place.
High risk securities and derivatives are newer forms of financial contracts based on values that are
derived from a particular price of another commodity or security. These financial instruments contributed
to the financial crisis in 2008. Brooksley Born, head of the Commodity Futures Trading Commission
from 1996-1999, warned about derivatives as early as 1997. The losses from increased oversight of
derivatives have caused JPMorgan to claim losses of $2 billion dollars this year (Levine). This whole
process is extremely complex and difficult for anyone to interpret it properly, leaving it open to
manipulation and deception to its investors and the public. Regulators cater to the interest of the industry
and not to the interest of the consumer. When you have an organization that doesn’t want to do the right
thing, it will demise the business world and thwart internal auditors and risk managers (Holland). Better
rules and regulations in favor of full disclosure would limit the amount of questionable practices involved
in these transactions.
The Glass–Steagall Act, also known as the Banking Act of 1933, limited commercial banks from
engaging in the investment business, limiting the kind of activity commercial banks could have with
security firms and bank insurance activities. These restrictions would inevitably be repealed though the
Financial Services Modernization Act of 1999 (FSMA). Repealing the Glass–Steagall Act made the
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market more vulnerable to these tendencies (Carow). These types of regulations should have stayed in
place; they could have limited the amount of transactions between banks and high risk securities firms.
Some would argue that the current markets are suffering because of over regulation but in fact
they are suffering from self-regulation, creating a lack of confidence and trust in the financial market
place. Under regulation helped cause America to fall into the Great Recession (Leinberger). In order for
there to be confidence, there must be security guards in place, to limit fraud and manipulation under
Keynesian style of economics, requiring heavy government interference and regulation. Under no
circumstances would a free market work because of the high probability of fraud, manipulation, and
deception that accompanies greed. When the markets fail to achieve efficiency, it’s the government’s duty
and responsibility to interfere and regulate them, to achieve better results.
Another aspect of the government’s duty and responsibilities is to provide a strong military
defense. Many believe that cutting government spending on the United States Military Defensive would
improve the nation’s overall deficit. However, this is a false claim. Congressman Barney Frank states in
his article, How to Save the Global Economy: Cut Defense Spending, that the United States is spending an
upwards of $650 billion per year on its military; including the cost of the wars in Iraq and Afghanistan
(Frank). Frank also states that:
If we commit to reducing military spending to a rate of approximately $430 billion a year over the next
decade, with suitable inflation adjustments, it would do a great deal to reassure people that we had our
deficit problem under control, that the long-term drain this puts on our economy would be diminished,
and that we could then afford the near-term economic stimulus we need to help accelerate our current
sluggish growth. (Frank)
We as a society can’t predict what will happen in the future as it pertains to military and humanitarian aid.
If the military spending was reduced by $200 billion, the results would be devastating towards the private
sectors Growth Domestic Product (GDP). A significant amount of the defense budget affects the
communities and the nation as it relates to the GDP. The military spending as of 2001, has accounted for
approximately 4.8 percent of the total GDP (qtd. In Wilkerson). In order to increase the nations GDP, the
military and defense budget needs to be increased.
Even though our military spending is a tremendous amount, the expansion of the military budget
must increase so the military can continue research and development (R&D). One thing the military’s
R&D sector created was the World Wide Web, or better known as the Internet (Moyer). The government
needs to create technology to protect America from online attacks. This includes computers that control
our Department of Defense, and computer networks that control our water and power utilities. The
government must keep sensitive networks from being breached from terrorists (Kohlmann). We need to
continue to provide monetary resources to ensure terrorism, globally or locally, will not threaten our
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people and our great nation. By striving for technological dominance in the air, on the ground, in the
water, and over the Internet, the military can continue to protect America, its people and its allies.
During these tough economic downturns, America must demand that the government step up, do
its job, and do it effectively through continuing Keynesian Philosophy. Without government intervention,
society would continue to endure harsh economic times. Without Keynesian economics implemented,
fewer government programs would be able to assist Americans. The financial sector would become more
corrupt than it currently is, and the American Military would not have the resources to continue to make
the United States safe. If the government uses Keynesian Philosophy, then this nation can achieve
economic improvements
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References
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