Keynesian Stimulus

Virtually all governments are run by Keynesians. Like any economic theory it is difficult to prove if correct. Politicians love power and Keynesian Theory suggests that governments can control the economy. If production falls the government can spend more to compensate creating perpetual growth. Its supporters have one example of it working, World War II ending the great depression. (It could be argued the growth was due to women and minorities joining the workforce rather than just government spending.)

In reality economies are complex and rely on constructive destruction. To make the most efficient use of resources, inefficient users have to go out of business so they are forced to sell the resource. This may be due to new technology making a product obsolete, climate change, changing skill set of labour, etc.

A Keynesian would argue that if demand for typewriters is falling the government should buy typewriters to keep typewriter companies in business. Ignoring the fact that computers with word processors have made typewriters obsolete. Instead of a gradual transfer of resources as individual companies go bust, once a politician realises their obsolete and cuts the subsidy the entire industry goes bust at once.

Another criticism of Keynesian is that democratic governments have to keep their voters happy by making them feel better off. Often increasing spending in an election year. This means instead of cutting spending in good times to keep the economy in balance, politicians end up supporting unsustainable growth. Turning the shorter up down economic cycle into a longer bubble and crash cycle.

A stimulus package should not be aimed at substituting private demand. All this will achieve is a deferral of the problem. Once the stimulus ends, the economy will fall back into recession. Obviously, a government should bring forward capital projects to take advantage of lower costs during recession periods. But the the aim of stimulus spending should be promoting the constructive destruction of the market. For example, offering rental and wage subsides to new businesses, investing in training and research, putting on trade fairs to open up new markets, etc.