Wade, and anybody else interested in Economics, government spending/debt/tax, etc.:

Consider this, if a person earns $60,000 - a good middle income figure, and is taxed at 20%, the person pays $12,000. If income tax is cut to 10%, the IRS gets $6,000 less, and the person has $6,000 more of spendable cash. If that person then spends that cash, it becomes income for someone else - stores, manufacturers, employees of the stores and manufacturers, etc. Those "someone elses" then in turn spend that money, and it becomes income for someone else. That cycle continues at least to the 5th level of the cycle. That would be $6,000 X 5 = $30,000 added to GDP and total taxable income. That is essentially what some call "trickle down" resulting from tax cuts.

Consider if government money is injected into the economy - salaries for civilian employees or military personnel, Social Security and other pensions, food stamps and other welfare type benefits, etc. That money also becomes spendable income - the great majority of it anyway. When spent or invested, it becomes income for "someone else", similar to the concept in the previous paragraph. This cycle also continues to at least the 5th level, adding at least 5 times as much to the GDP as the amount of government spending, and this too becomes taxable income.

This concept has been called "Keynesian Economics" because it was theorized by Lord Keynes in Britain a hundred or so years ago. To me, it is just simple mathematics - something that shouldn't even be controversial or debatable. Why would it not be valid and factual? And the same should be true whether the source of the additional money in the hands of people is reduced tax burden OR government spending.

Comments please.

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I would add, that any job being performed by government that can be performed by the private sector should also. Example I use is TSA. We tax TSA employee salary, but if they were employees of a private sector business, not only would we get tax revenue from the employee salaries, we would get tax revenue from the business revenue. Increasing the size of the tax base while reducing the tax burden which would reduce the individual tax each person needs to pay.

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Keynesianism is a bunch of obscurantist drivel that mainly pertains to creating money out of nothing to "stimulate" the economy. In theory, he also says to pull it back out during times of boom, but that never actually happens, making Keynesians into monetarists, like devotees of Milton Friedman.

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The saddest part of all of it is: most "jobs" done by government are over costing and under productive.
The private sector, businesses would go under if they lived by the same "rules" of government.

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But the simple MATHEMATICAL fact is, it DOES work. Why would it not? And that includes BOTH the tax cutting benefits stated by Friedman AND the spending side theorized by Keynes and a lot of modern economists.

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That may be true on the first level - make-work type jobs directly funded by the government, but those people spend the income, and the next and next, etc. levels spend, resulting in REAL growth.

You're partially right about businesses living by the same rules as government. However, the government has the power to print money - money which is back by our own debt instruments - money which is the world's Reserve Currency. Every country's debt must be repaid in what? DOLLARS - hard currency to other countries, but easily created by America, the Reserve Currency nation.

Besides, most successful businesses DO use debt - often a LOT of it - the word is LEVERAGE. If your rate of return is greater than your cost of capital, then leverage is good business.

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Pedantic point: Technically, the multiplier idea you describe originates not with Keynes, but with one of Keynes students, Richard Kahn.

Substantive response. No question there is a multiplier effect, though the size of the multiplier has been much debated. Also much debated is whether the multiplier is bigger or smaller when the spending involved is "countercyclical" (i.e., done at the time of a "downturn" in order to stimulate the economy to increase).

No one disagrees with the multiplicative notion -- after all, apart from Scrooge, no one holds on to money forever. All of us either spend it today or save it and then spend it in some tomorrow.

But that is true of *all* spending, private as well as by the state. And that's the biggest problem with the Keynesian multiplier story that you have bought. Why do we think that the recipients of government spending are going to be more likely to immediately turn around and spend more themselves than current possessors or funds or than recipients of funds spent in the private sector?

After all, whether you fund the expenditure with current tax dollars or with future tax dollars through deficit financing, you're taking funds away from potential spending elsewhere in the system.

Unless you believe that the government is better at making spending decisions (i.e. at putting money where it gets re-spent more and better), the *net* multiplier could very well be less than one. That is, for every dollar of government expenditure, more private expenditure (through its multiplier) is lost than is gained through the multiplicative effect you describe.

To be sure, we have a correlation between the amount of government spending and the amount of the overall wealth increase. But correlation need not be causation; the real reason for the growth in wealth may not be because of the government expenditure but *despite* that expenditure's net drag on the system.

Take your example of $6000 of expenditure. If the multiplier turns out to be 0.75, then the net effect is $4,500 of new value at a cost of $6,000. Or a net of $1,500 lost and not able to be spent ANYWHERE in the economy. Another example is the idiocy called the "Cash for Clunkers" program, where the cost per car worth $20,000 or less ended up being $80,000 or more.

Historically, however, the private sector in this country has been so productive that they can get a return on investment that is not only positive, but remains positive even after having to make up the $1,500 and the $60,000 and the extra $5000 paid for DoD toilet seats and all the rest.

The amount of deficit financing by itself isn't the problem. The problem isn't even the amount of government spending overall. The problem is *what* the government spends the money on.

Keynes was a member of the small-but-highly-educated British elite. He believed in a big money multiplier because he believed, as did most of his fellow members and consultants to the British civil service/political leadership, that said civil servants (a/k/a government decision-makers) were better at choosing where to spend money than the part of the British population outside government. Just as today's elitist liberals and conservatives in the federal government believe that they are better at knowing where to spend other people's money than all of us are.

I think Keynes was wrong, and I think those modern feds are wrong.

Profoundly, horribly wrong.

America has been better at creating *new* wealth than any society anywhere and anywhen in human history. And Americans since World War II have been better at creating *new* wealth than Americans before and during World War II. But if America had not taken the approach to government spending that the second Roosevelt started us on and every administration and Congress since has worsened, we would have created even more wealth.

A lot more.

I'm often accused of being an elitist. But if I am, I am a far different kind of elitist than Keynes, today's federal politicians and bureaucrats, and today's Fortune 100 CEOs. I'm the kind of elitist that believes that ordinary Americans (those you describe as "good, normal Americans" and those who are out there marching to the beat of different and wacko drummers) systematically are better spenders that don't need anyone's help to spend their money in the most productive way.

That's what I believe.

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A lot of what you say I agree with, Wade. Several points, though:

You didn't really deal with one of my points - that government spending putting money in people's hands and tax cutting increasing money in people's hands are essentially two halves of the same concept, even though the one is pushed more by libs, and the other is pushed more by conservatives. I would argue that you can't believe and support one without believing and supporting the other.

You talk about private spending having at least the multiplied positive effect as government spending - and I would add government tax cutting. Yes but ...... private spending is not "original" - it does not inject money into the economy. It basically CONTINUES the multiplied effect of new money injected. A corporation or individual increases investments or spending in much the same variety of ways I mentioned that the government does, but where did that money come from? Ultimately, it comes from increasing the money supply i.e. government debt instruments. From that point, it is merely level 2, 3, 4, 5, and so on of the multiplier effect.

If I understand your ".75" figure for the multiplier, you mean 75% of the income people derive from spending (or tax cuts) is respent and becomes income for someone else? Again, yes but ...... that and your "$4,500" figure are just the first level of multiplier effect. The same things happens - again and again and again - debatable maybe how many "agains" but several at very least. I would argue that it, therefore, is not $1,500 lost between the cracks or whatever.

The thing about wasteful government spending, etc., that I see as pretty much a red herring. Nobody is in favor of the $5,000 toilet seats and similar stuff. On the other hand, though, even that extreme example is $5,000 in somebody's pocket - a little bit to suppliers of material and wages, way too much for profit. However, the individuals and corporate persons receiving those funds still turn around and spend or invest most or all of the money, which hopefully, on the second level and beyond is not so wastefully spent.

Granted, Keynes and his buddies may have been elites and/or elitist, but that too is kinda a red herring. The point is, the concept - as you even seem to concede - worked and still works. Their elitist methods served to build up the standard of living of a lot of regular people - ditto that for America in the present.

As for FDR allegedly snapping us out of the Great Depression with government injected money/created wealth and, even more so, his financing of World War II with a lot of debt, I would argue that the greatly increased money supply resulting from this led to the post-war boom and overall American economic enhancement. You say things would have gotten a lot better/created a lot more wealth WITHOUT all that debt financing and injection? I would say that without that - with Calvin Coolidge-style balanced budgets, etc., the whole situation would have been "zero sum" - a non-expanding pie which would have resulted in winners and losers in the economy, but no "rising tide to float all boats", just a situation where the class warfare that the Obama-esque Left likes to promote really would have occurred - the lower classes languishing while the capitalists prospered - that or French Revolution or Communist-like uprisings of the people to violently force redistribution.

All of that would be "kicking the can down the road" - using debt to live large and screw our future generations EXCEPT for the fact that we are the Reserve Currency nation. Our debt does NOT weigh heavy on the economy; It, rather, lets us live large on the backs of the creditor nations of the world - but wait, the world also, is NOT a zero sum economy. OUR spending in their countries enhances their economies too, and more importantly, our umbrella of protection as the world's dominant military power prevents Islam/Sharia Law, Communism, Nazism in the past, etc. from disrupting the world wide upgrade of Freedom and Standard of Living in this Pax Americana era.

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