Another reason why Keynesian economics doesn't work


Let us imagine that this Keynesian idea that government should spend more money in a recession stands. Not that we'd want to give in to the case in general, but let us assume it for the moment. Why might it still not be a good idea to depend upon this tactic? As Larry Elliot explains:

The second drawback is that the investment – even assuming it happens – will take time to arrive. Every EU country has sent in a list of pet projects and these will have to be assessed by a panel of experts before a final list can be drawn up. This is a recipe for bureaucratic delay and the customary horse-trading as each country demands its share of the action. It is unlikely work will begin on a single project until 2016, when what Europe needs is an immediate boost to demand.

That could come in three ways. It could come from a more meaningful push from the centre, perhaps through the European Investment Bank. It could come from nation states if they were given more budgetary leeway by Brussels to run bigger deficits until growth has returned. And it could come from the European Central Bank through a quantitative easing process. The latter is by far the most likely and will dwarf in size what the commission has just announced.

Government, most especially at the EU level, is simply such a lumbering and inefficient giant that it's not possible for it to get such fiscal stimulus moving in the required timescale. Very much like the American experience of insisting that there were all sorts of "shovel ready" projects out there, then finding that government rules mean that nothing is ever shovel ready. There's always a year or more of paperwork to fill out before anything can be done.

With us still accepting the basic premise, that the deficit should widen, that there should be a greater gap between tax revenues and government expenditure in a recession, perhaps we should be looking for something that acts near immediately instead of increased spending? Like, say, an automatic reduction in national insurance payments in a recession? Like, umm, Keynes himself said would be a good idea?