The Truth About Keynesian Demand-Side Theory

Let’s turn to the basics. In the Keynesian view of the world, government deficits are expansionary. They lead to greater overall spending in the economy. Balanced budgets and government surpluses are contractionary. They are “austerity” policies. Deficit spending, of course, can be produced by an increase in government spending or by a reduction in taxes.

So there you have it …. Ooops. Did you say tax cuts are expansionary? Yes. Tax cuts. The Keynesian model is a demand side model. A tax cut puts more money in the hands of people, and when they spend it, aggregate demand increases. There are no direst supply side effects in the model. Tax cuts don’t get people to work more or save more or invest more. But they do get people to spend more.

Via Keynesianism Vs. Paul Krugman And Why We Aren’t Growing Faster @ Forbes.

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