Keynesian Economics and Big Dams

There is a good bit of argument about whether Keynsian “pump priming “ (government spending to increase demand in recessions) really works or not. It would appear that it hasn’t worked well in the current recession, but some would argue that the “stimulus” package wasn’t large enough to be effective, while others argue that with our current national debt, we really couldn’t even afford the stimulus package we got.

All of this reminds me of big dams. Big dams are usually sold as solving two problems : (1) providing cheap electric power and (2) providing flood control. The problem with this sales pitch is that the two uses are in conflict. For power one wants the lake behind the dam as high as possible for maximum head in the turbines and for maximum reserve, yet for flood control one wants the lake as low as possible so it can absorb the maximum flood waters.

The parallel I see with Keynesian economics is that to preserve the government’s ability to borrow money to fund stimulus packages in recessions, one needs to keep the public debt low to preserve the ability to borrow in emergencies. Our problem now is that we have already borrowed up to the hilt, so it is hard to borrow lots more to provide government stimulus funds. We are like the dam that suddenly needs to absorb flood waters, but is already full.

Keynesian economic theory may or may not be correct, but if one believes in it, one must also believe in keeping public debt low so that there is ample room to borrow for stimulus in recessions. Politicians don’t seem to have figured that out yet.