Demand-side Economics

* Basic idea

- jump-start economy by creating demand for goods and labor

- government borrows money and spends

- new government jobs and government contracts with private biz create growth

- also called Keynesianism after John Maynard Keynes

-> invented the approach to deal with the depression

* How to do it

- get some money

-> if a surplus exists, spend it

-> raise taxes

=> will cause problems because taxes dampen growth

=> can be used if only part of econ needs growing

-> borrow

=> run a deficit, add to the debt

- spend it

-> create jobs programs

=> highways, buildings, wage bonuses for weak workers

-> order goods from business

=> food programs for poor help farmers

=> roads, buildings, etc. help construction, auto,

materials, etc.

=> in wartime, military stuff

-> pour out consumer money

=> welfare, unemployment insurance, food stamps

=> when spent, they will boost the economy

* Benefits of demand-side

- often the only source of cash, esp. in depression

-> a tax cut or rate cut won’t revive a dead economy

-> you’ll go into debt, but can repay when econ revives

- redistributes income

-> rich tend to pay more taxes, benefits tend to go to

poorer

- creates needed infrastructure and services

-> roads, schools, hospitals, airports, flood control, etc.

- acts as an investment

-> better schools bring better workers

-> roads make trade easier and cheaper

-> flood control saves property and makes new land available

- can be targeted by location, race, gender, age, anything

-> find a group and set up a program for them

-> Title IX, federal scholarship money, set-aside contracts

for women and minorities, social security for old and

infirm

* Weaknesses of demand side

- debt and deficits

-> eventually, you have to pay

-> higher taxes will eventually slow economy

-> short-term fixes often linger after they are needed

- slow to get started, though quickish once legislated

-> a year in congress for major spending

-> a year for effects to be felt

- targets the rich usually, and they will strike back

-> will flood in political money

-> may move their money out of country

- soaks up capital, raising interest rates

-> government gets much of lend-able money, leaving little

for business

- brings many resources under control of inefficient

government

- undercuts the private sector

- makes people dependent on government

-> a habit of being bailed out in failure

- doesn’t eliminate the business cycle