Keynesian Economics

(MoneyWatch) 

Will the stimulus save us?

Ever since President Obama signed the gargantuan stimulus bill into law, that's been the $787 billion question. The answer? Sure, it could help, but a big check alone cannot rescue the economy.

The stimulus plan's biggest supporters (with some reservations) are Keynesian economists, so called because they subscribe to ideas developed by economist John Maynard Keynes, who argued that in an economic downturn the government can stimulate demand by, in effect, paying people to dig holes in the ground and then fill them back up. Other experts oppose the plan on the grounds that government spending is either ineffective or will have negative consequences down the road (or both).

While economists differ on the likely effectiveness of the stimulus package, they tend to agree that the economy can recover only when the financial system regains its health — hence the $2.5 trillion bank rescue package announced in February.

Editor's Pick

• Will the Stimulus Plan Work?

  Depending on how you look at it, it was either a bold investment, or a disgraceful government boondoggle.

• Yes, It Can

  New York Times columnist David Leonhardt argues for the effectiveness of fiscal stimulus in overcoming recessions.

• The Power of Spending

  Brad DeLong, a prominent Keynesian from the University of California at Berkeley, says all economic growth is driven by spending, be it from the government or the private sector. Just as home building powered the last boom, the government stimulus money will help today.

• You Can't Please Everyone

  You'll find critics of the stimulus bill on both sides of the aisle. Conservatives say it's a grab bag of liberal policies that won't do much to help the economy, while liberals maintain it doesn't go far enough.

• Show Us More Money (Video)

  Nobel-Prize winning economist and New York Times columnist Paul Krugman thinks the stimulus needs to be a whole lot bigger — and expects a second spending package soon.

• A Smarter Tax Give-Back?

  Because consumers tend to hoard the cash, tax rebates don't necessarily ignite economic growth. Giving the money back by taking less out of every paycheck could be more effective, says The New Yorker economics columnist James Surowiecki.