New Keynesian Economics

John Maynard Keynes is one of the most prominent economists of all time. His essential conclusion is that the economy may not be working at its full potential during economic downturns. This calls for an outside force, aka the government, to intervene until the economic downturn is over. Personally, I believe this is necessary and it is what the government is doing now. They helped the banking industry, the auto industry and the real estate industry with billions and billions of dollars. However, I believe over the next 20 years there will be a dividing line between economists and the extent of interventions.

This current crisis is changing the economy that we will have until the next major ripple(the great depression and our current crisis.) There has to be a line at which the government cannot be responsible for the private forces that are causing the economy to crumble. I say this because they cannot know what amount will be the right amount with each intervention; hence the AIG news that was released about how they were spending their bailout money. The government cannot be fully responsible for private sector actions. That is a pandora’s box waiting to explode.

As we have seen in the Bank of America scandal (if you are unfamiliar read posts below,) because small body with that much power is destined to fail. That is why capitalism thrives on the free hand. When the general population makes personal decisions to better themselves no one holds all of the power. When the government chooses which car company to save, they are affecting the consumer. As we saw they extorted Bank of America into preventing Merrill Lynch to fail and bringing further commotion to the market in the short term. In the long term they established themselves as players in the private sector, the big stick in the pond. They chose to bail out certain car companies that may not be conforming to the current eco friendly trends of the market. Essentially the intervention in the long term could cause even more detrimental effects to our economy as we know it.

There needs to be a dividing line in macroeconomic theory that further points out the extent of outside intervention in the economy, New Age Keynesian Economics.

Hope everyone is having a great summer,

Matthew James