🏫 Schools Out!

Doesn't it feel good to finally be done with school?

No more tests, exams, quizzes, or essays.

Maybe you have graduated already or have the summer off before you start again in the fall? It's nice to have a break.

Speaking of schools which are never on break let's breakdown the Keynesian school of thought.

Named after famous economist John Maynard Keynes. Keynesian economics teaches that spending drives the economy. Where are my stimulus checks?

Basically, the more you spend, the more money is circulating in the economy. You get your paycheck, you spend it on food, housing, fun toys, etc.

Then those businesses will take what they earned from you and spend it on wages, rent, insurance, etc.

The cycle continues. The more you spend and spend the more it drives the economic engine.

And the faster you spend it the more velocity the money has. This is called the velocity of money. Along with the fiscal multiplier effect (That you spending $1 causes $50 of spending throughout the economy) spending is the driver of economic growth.

This school of thought is the most pervasive with most economist and policy makers. We can see this with the multiple rounds of stimulus checks over the past few years.

The goal was to get $ into your hands so that you will go out and spend it on good and services during a time when the economy needed it most.

Keeping consumer demand high is key for the Keynesian school. To accomplish this goal, the government must be highly involved.

Keeping consumer demand high is key for the Keynesian school. To accomplish this goal, the government must be highly involved.

But how does the Keynesian school deal with economic crashes?

Recessions are caused by a lack of consumer demand and those darn sticky wages.

Think of demand as the oil that greases the engine. If demand (spending) decreases to a low enough level, businesses will close and people will lose their jobs due to sticky wages.

Let's say you get a raise! Yay! Your new salary is 10% higher at $55,000/year. Would you want to go back to $50,000/year? For most people, that answer is no.

That new salary is your new floor. You will not take anything less than that amount as you know what your worth is in the job market.

Now spending slows down, people are worried about a upcoming crash and start putting more $ into their savings accounts to survive the storm.

Businesses now aren't making enough money and you don't want to lose that new salary. So companies will now start laying off people. This further decreases spending. A cycle.

According to Keynes, the government needs to come in and interrupt the viscous cycle with deficit spending. This often takes shape as large infrastructure projects.

So the fundamentals of Keynesian thought are:

• Demand (Spending) = good

• Too much saving = bad

• Government interference required

• No one likes to make less money

• Money can multiply

What do you think? Does the Keynesian school make sense? Are there flaws in his theory?

Thank you for reading. See you next week.

As a little tease for next week we will be talking about another school. Can you guess what it will be?