Reviving the Keynesian Animal Spirits

Reviving the Keynesian Animal Spirits

The World Economic Forum 2024 is currently meeting in Davos, Switzerland. The WEF is an annual meeting of some of the top leaders in business, government policy makers, economists, and other great thinkers contemplating and discussing the world’s toughest social issues. The WEF was founded in 1971 by Klaus Schwab, a business professor in Switzerland.

As an undergraduate Business Economics major at Virginia Tech I was required to take many courses and studies on Keynesian Economics. John Maynard Keynes, in his book General Theory of Employment, Interest and Money, proposed many of the ideas foundational to modern macroeconomics. Indeed, all students of economics of the past 70 years have learned Keynesian Economics.

In brief, Keynesian Economics presents the idea of Governments and Central Banks intervening in the wild swings of markets and the economy. When the markets and economy are engaged in irrational exuberance and has many over-price asset bubbles, then the governments and central banks enact a contraction fiscal and monetary policy to reign-in asset prices and curb demand. When the markets and economy is in a recession, then the governments and central banks enact expansionary fiscal and monetary policies to get the economy back on a path of growth. There are several mechanisms by which government leaders and policy makers can enact contraction or expansionary economic policies. Keynesian Economics primarily effects the aggregate demand in the economy and markets.

The main idea of Keynesian Economics during a recession is to spur the animal spirits, or light a fire under the demand for products and services, by lowering the cost of borrowing, lowering taxes, and passing stimulus bills to insert money directly into the economy. This injection of money into the economy can be measured in several ways for its effectiveness, and usually has several short-run and long-run economic implications.

Unfortunately, the U.S. government is currently drowning in $34 trillion of debt, with around 130% debt-to-GDP ratio, the highest debt-level in nearly a century. It seems most of the U.S. economic prosperity of the past 20 years has been entirely due to issuance of massive amounts of debt by a bunch of government crooks hiding behind Qualified Immunity legal protections. Washington D.C. recently had its credit rating downgraded and is on further credit watch. Presently, the U.S. government could not pass a trillion dollar stimulus bill package for a recession, or any other kind of national emergency, because Washington D.C. simply does not have the money. It is unclear that a Central Bank can tackle the problems of inflation, unemployment and economic growth with monetary policy alone and with an $8 trillion balance sheet. Most Western Governments are in the same or a very similar economic situation.

Consequently, the Keynesian Economics of the past 70 years cannot be used with near century-high government debt-levels. In short, the U.S. and other Western Governments will ultimately force their respective citizenry to deal with economic recessions, and other national emergencies, on his/her own with very little financial help from the central government. By my estimates, it will be 20 to 25 years before the U.S. Government debt-level returns to a manageable level. During which time, there is no one to revive the Keynesian Animal Spirits during a recession, or any other national emergency.

 It is not surprising Economics and other Business-related majors are the most popular degrees conferred, both on-campus and online. My alma mater, Virginia Tech, now offers an online Master Agricultural Economics and an online Master Business Administration. Additionally, the Economy is the top issue of concern for voting Americans, according to the most recent 2024 political polls. Modern personal computers and other technologies might help alleviate and blunt some of the harsher negative effects of a recession or downed-economy. Nevertheless, one can expect very little help and assistance from their respective governments, while the debt-levels remain elevated. It will be 2 decades before the financial mess of Washington D.C. is addressed and Keynesian Economics returns to revive the Animal Spirits.