The ideological opposite to this question, whether Trickle-down Economics has improved any economy, has been asked. The accepted answer insinuates that Trickle-down Economics probably does not work in general.

Therefore, I want to ask what the empirical evidence for the economic theory which is often seen as the opposite of Trickle-down Economics, Keynesian Economics is. I would prefer if an answer in the affirmative could control for confounding factors. So the American recovery after the Great Depression is not a great example because the Second World War is a confounding factor.

It's up to the answerers to define the meaning of "improving the economy." It could be any metric that is often considered in economics to be good; such as lower unemployment rate, raised gdp growth, lower inflation and so on.

  • Over what duration of time? – Drunk Cynic Feb 13 '18 at 22:35
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    Trickle-down and Keynesian Economics are not polar opposites. Strictly speaking I would argue their basic premises are not even mutually exclusive. By Trickle-down do you mean Supply Side Economics (lowering taxes and regulation)? – armatita Feb 14 '18 at 9:23
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    Are you really asking the question you intended? the IMF page you link for the definition starts with "The central tenet of this school of thought is that government intervention can stabilize the economy." The government can well intervene by lowering taxes (if that is what is needed at one point). Or do you mean to ask about the mixed economy idea? Or maybe you mean to ask about interventions based on en.wikipedia.org/wiki/Neo-Keynesian_economics This is what the IMF page talks about in its last part "Keynesianism evolves" – Fizz Apr 5 '19 at 22:19
  • And what did change in the aftermath of the Great Recession is a very limited change to the "evolved" Keynesianism, namely the abandonment of the Jackson Hole consensus on non-intervention in the asset market. – Fizz Apr 6 '19 at 0:37
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    Re "confounding factor" qualification: The world is not a single tasking CPU running an Econ. 101 formula; world events are so inextricably parallel that removing confounding factors removes economics. Put another way, there's always several other big things going on, (and if there's no wars, there's always cold wars), so a theory's advocates can always say, "It did work, but event X obscured it", a theory's opponents can always say, "It failed, but event Y obscured that". – agc Apr 6 '19 at 12:00

In something as large and complex as national/global economies, I doubt all factors can be accounted for, so some argument can probably be made against any example of Keynesian Economics'(or any other policy) effects.

However, a good-enough recent example of Keynesian policies having a positive effect on an economy could be the mortgage crisis back in 2007:

In an attempt to prevent, or at least relieve, the expected recession, the US Congress pass the Economic Stimulus Act of 2008, estimated to cost about $150 billion for 2008. The federal reserve chairman at the time highly recommend tax rebates to encourage the average American to spend money despite their fears of recession. Increased consumer spending would result in businesses having more revenue, which in turn encourages them to spend more on goods and employees. One study estimated that an average family who received a tax rebate spent 3.5% more than a family who had not yet received theirs, directly increasing overall purchases of non-durable goods by 2.4% during the first fiscal quarter that experienced the rebates.

In short, Keynesian Economics can at least result in increased consumer spending during a recession, when decreased consumer spending is both expected and bad for the economy.

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    You can also compare the size of stimulus packages in other economies with how long and how deep their recessions were. AFAICT, larger stimulus was correlated with shorter and shallower recessions, at least in 2008-10. – Rupert Morrish Feb 13 '18 at 20:24
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    @RupertMorrish: Yeah, there is a lot of info regarding attempts in various countries to alleviate the 2008 recession, most of which had the result of 'more spending -> fewer failed businesses -> less recession'. The Wikipedia article on the crisis has about 30,000 words, and that's just the summary. – Giter Feb 13 '18 at 20:53
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    2007 is too close to now to use it as an anecdotal example, because we haven't seen the second phase fall out from the severe quantitative easing. – Drunk Cynic Feb 14 '18 at 1:24
  • @DrunkCynic: I don't have enough economics degrees to understand most of what you said. However I figured 10 years was good enough to study the effects of the policies, and it was simply the first one that I thought of. The incredible economic expansion after WWII could be another example if you want something older, and is really the oldest example since the asker didn't want to count the Great Depression: en.wikipedia.org/wiki/… – Giter Feb 14 '18 at 1:42
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    Data does not equate to info, 10 years does not provide for proper impacts, and wikipedia isn't the most robust resource. – Drunk Cynic Feb 14 '18 at 7:07

Before I start - I need to make a note for readers - I'm biased towards free market and against communism/egalitarian economy based on my own education (BA in finance and banking and MSc in Comp. sci.), experience (living in communist-ruled state) and business experience (own startups, parents' business, etc.).

Both questions - regarding Trickle-down and Keynesian economics will have a significant amount of ideological bias from people who answer these. Let me answer this first ... why these questions are not "hard science" and there is right or wrong answer to any of these without additional assumptions like time (short vs. long-term), demographics, society.

Important issue was raised in the selected answer to linked question about Trickle-down economics - is economics hard or soft science. For computer scientist and math geek it's simple - it's soft. It depends from the behaviour of the mass. You could imagine going to different planet (or meeting isolated tribe on Earth) in which the answer to any of large-scale economics problems would be different/opposite than for you/your country.

This is the reason why even answering these two questions without context (country, society, etc.) is never a complete answer.

Another issue most answers to economical questions is that people support their claims with analysis of certain policies without analysis of the alternative and without analysis of the timeframe.

Above you got answer from Denis de Bernardy, who claims that QE "worked" as a support of Keynesian policy. You will find all sorts of claims like that, but without analysis the negative impact of the solution and the "what-if" analysis of the alternative, it's very often misleading. The aim of the QE was to avoid the defaults of financial institutions which "gambled" on financial market. If you want to achieve that at all cost, in short term ... yes, Keynesian approach works perfectly.

However, if you analyse how much money has been put into the economy and in consequence, what impact was imposed to individuals in the market in the long-term - I tend to disagree.

Keynes with his ideas towards public stimulus programs aimed at flattening of the business cycle curve to reduce the negative impact for the working class with a top-down approach. Austrian school economists on the other hand state that avoiding natural crises has negative impact as crises allow removing allocation of resources in un-efficient initiatives and parts of economy. It's the time doing "poker-like showdown" or "checks-and-balances" of investments and removing the ones that do not work. Avoiding that creates an environment in which the inefficiencies are supported rather than removed from the economy and reallocating of resources in more efficient parts is not achieved.

The forced reallocation of resources into more efficient investments/businesses is what is causing a lot of societal problems as people lose jobs and are not able to maintain their standard of living for some period of time.

Austrian school economists support the approach in which most of the resources are maintained in hands of the people (lower taxes) which allows them to create buffer for the times of crisis (bottom-up approach). The principle behind it is individuals are more efficient in spending their own money (both for goods as well as secure-investments) than the state. The problem with that is though, significant portion of society does not want to take responsibility in creating this safety buffer and is demanding state to do it - this is a societal problem as a lot of people tend to spend 100% of their income, regardless of how large it is.

To have a short answer to your question - yes, Keynesian approach works well in short term when it comes to relieving the potential impact of crises of individuals (less sacking when economy is down), but - in the long term it's:

  1. Deferring the crisis in time at the same time pumping it up, so it's a lot larger.
  2. Allocating resources (both money and manpower) in inefficient investments and parts of the economy in comparison to the alternative (not doing any QE-type of programs)
  3. Increasing long-term debt as - as stated in above answers - states are not fiscally responsible enough to save money in times when the economy is in good shape.
  4. Taking away the responsibility of people to act responsibly with their financial assets - this creates a negative societal results. People no longer see what is the result of being reckless with their money as state will always help.

Now going for a second to Trickle-down economics, which is in fact supply-side economics follows the principle of lower-taxes and limited regulation. I tend to agree with Margaret Thatcher with her response to the question: socialists' question "how you could defend policies that resulted in the gap between richest 10% and poorest 10% widening substantially. The poor were relatively less better off than the rich."

Her response was: "All levels of income are better off than they were in 1979. But what the honorable member is saying is that he would rather the poor were poorer provided the rich were less rich. That way you will never create the wealth for better social services as we have. And what a policy. Yes. He would rather have the poor poorer provided the rich were less rich. That is the Liberal (British Socialists) policy. Yes it came out. He didn’t intend it to but it did."

Everyone has to understand that in supply-side economics there is going to be larger economic inequality, but everyone would be better off in comparison to the alternative. Supply-side economics creates and environment in which:

  1. There is more incentive to take risk in business, which creates more jobs, but with a little less job security as there is more fluctuations.
  2. Economic efficiencies are naturally promoted. Cheaper and better products and services win with the opposite, as there's limited artificial support from the government.
  3. There is a sense of imposed responsibility on individuals with its goods and bads.

None of these approaches is "best" and well suited for every society, but I know which one is best in the long-run. Think about it - do you know any country with Keynesian approach became rich after being poor? (Excluding ones which gained wealth mostly from mining/resources).

Last note - Trickle-down is not the opposite to Keynesian economics. They are different, but not mutually exclusive.

Apologies for a long rant (as I just discovered politics.stackexchange) and mistakes as I'm not an English native.

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  • Comments are not for extended discussion; this conversation has been moved to chat. – Philipp Feb 16 '18 at 17:15
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    "Think about it - do you know any country with Keynesian approach became rich after being poor?" Post-war Germany is a good example, with the introduction of "Soziale Marktwirtschaft" often cited as the contributing factor to the "Wirtschaftswunder" (the enormous economic rise after WWII, compared to other devastated countries after the war). "Soziale Marktwirtschaft" was not 100% Keynesian, but far more Keynesian than supply-side economics. – Thern Feb 22 '18 at 14:20
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    "People no longer see what is the result of being reckless with their money as state will always help." That has nothing to do with Keynesian economics, but with the social welfare system. Keynesian economics means "deficit spending in bad years, deficit consolidation in good years". That is completely independent of the welfare system, since welfare is independent of good or bad years; in particular, you wouldn't increase it in recession years. You seem to discuss socialism vs. capitalism, not Keynesian vs. supply side economics. – Thern Feb 22 '18 at 14:25
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    Well some argue that Ordoliberalism in post WW II Germany is the exact opposite to Keynesian economics. Re your second comment - I wasn't refering to welfare system, but to Keynesian pumping money into inefficient economic activities which prevent from "hard resets" leading to cleansing but also people loosing jobs. I wasn't referring to giving handouts to unemployed, but pumping government money to keep artificial levels of employment, which leads to people not worrying about their cash-flows that much. – Jacek Serafinski Feb 22 '18 at 14:59
  • I think you're confused what the en.wikipedia.org/wiki/Austrian_School is about. – Fizz Apr 5 '19 at 21:57

John Maynard Keynes published his most important book, 'The General Theory of Employment, Interest, and Money' in 1936, and died a decade later in 1946. So we have to understand Keynesian economics within the context of the aftermath of the Great Depression in 1929, when he wrote the book, and when unemployment was somewhere between 25-33%.

The argument between Keynes and his detractors centres of whether to prioritise unemployment or inflation. For Keynes, the issue was that economic systems, if left to their own devices, simply can't cope with boom and bust. Given this, the state must intervene. Keynesian economics says that getting people working is more important than worrying about inflation, because the economy is like a depressed person and needs help to recover.

This works fine assuming the economy grows plenty in the future. A rapidly expanding economy inevitably has high inflation, and this helps take care of the debt problem of government spending in the short term. Especially if this money is invested mostly in infrastructure, which, like scientific research, has a very high return on investment.

The same logic motivated Roosevelt's New Deal in 1933, that spending on infrastructure projects in particular would help to get people back in work and thus get the country back to an optimistic state.

Britain's 1945 general election was won by the Labour party, promising an essentially Keynesian plan, with massive public infrastructure projects, slum clearance, housing construction, nationalisation of industry, etc.

The Labour party was twinned with the labour union movement, and as such worked to provide and then secure employment for their members. This they reckoned was best for individual and society, as unemployment was regarded as something on par with poverty, ignorance, or malnutrition.

After the war Britain was broke. In 1940 the British Empire conducted the largest wealth transfer in history, by moving an enormous quantity of money and gold to Canada to buy American war materiel. When the war began Britain had also inherited a sizeable debt from the First World War, a sum it was still repaying (a sum which was never actually fully repaid to American creditors given the outbreak of the Second World War).

Britain's public debt in 1945 was just shy of 250%. And then the British government went on a spending spree. The consequence however was that living standards improved and government debt steadily declined.

Things were going so well that in 1957 Conservative Prime Minister Harold Macmillan said "You've never had it so good". This he put down to increases in the productivity of major industries. Not to mention the benefits of a society where everyone had access to university education.

By 1972 public debt was just under 50%. So for that era, Keynesian economics worked just fine. In the 1950s Britain actually had labour shortages, and so tried to hire workers from the Caribbean.

However, nobody expected Stagflation. In 1965 Conservative politician Iain Macleod famously said:

"We now have the worst of both worlds—not just inflation on the one side or stagnation on the other, but both of them together. We have a sort of "stagflation" situation. And history, in modern terms, is indeed being made."

The 1970s would see considerable economic disruption and uncertainty, and the Keynesian model didn't help. The British government tried to manage wage rises against inflation, given state ownership of industry meant the state employed so many people. Because the Labour government was born of the labour union movement, it found itself unable to negotiate with labour unions successfully, and repeatedly gave in to above inflation pay rises, which made things worse.

This crisis escalated into the Winter of Discontent in 1978, Margret Thatcher's Conservative election victory in 1979, and the end of British socialism shortly thereafter. Thatcher would adopt a Monetarist view, and prioritised inflation over jobs, which meant the Keynesian era was over.

To conclude, Keynesian economics worked in Britain after the war, but it wasn't able to predict or adapt to the realities of stagflation which emerged in the 1960s. Like all economic plans, it is situational and has a limited shelf life. If an economy can expand rapidly with large infrastructure projects, and suffers from high unemployment, then it can probably work for a decade or two.

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  • Good answer, but 20/20 partisan hindsight about stagflation seems like irrelevant finger wagging. Plus the Iain Macleod quote attribution would be less vague if it noted that in 1965 (not 1970) at the time of that quote, Macleod was an MP and a Shadow Chancellor, but would not be appointed the actual Chancellor of the Exchequer until five years later. – agc May 1 at 6:43
  • @agc Thank you for the correction, I have edited it. I didn't think mentioning stagflation was partisan. The reason I put it in, was to contextualise the fall of the Keynesian consensus, along with deteriorating labour union relations. As I say in the conclusion, it worked, but like all economic theories it has a limited and situational shelf life. – inappropriateCode May 1 at 12:13

The problem with questions like this is that to give an answer, you need an experiment where both paths are taken. That's difficult-to-impossible to find. Maybe if a country were to split up, taking different political paths, you would get some info. But examples of that tend to be capitalist/communist, which isn't what you are asking about.

So one is left with unprovable cases where only one side was taken. All you can do is observe the results that actually happened and argue about whether or not things would have been better had one gone the opposite way. Here are two examples relating to the 2009 US stimulus:

The conservative AEI "proves" that the 2009 stimulus didn't work

The liberal NYT "proves" that the 2009 stimulus did work

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Keynesian economic policy would have you run a budget surplus during good times so you can run a deficit during bad ones. The latter has been tried, but politicians have never been disciplined enough to do the former, resulting in insufficient stimuli during the crisis that arise. Put another way, one could argue it has never really been tried.

With that being said, two points:

During the 2008 crisis, the response arguably was largely Keynesian in the US and elsewhere. In some sense - if kicking the can down the road and shifting private losses onto the public qualifies as having worked - the response arguably worked in that the economy didn't go down the drain 1929 style. The crisis had all of the hallmarks of being a new GD; and it still does, in that the private debt levels are still sky high. But it wasn't a GD style disaster. So crisis averted - until now.

One major criticism of Keynesian policy response holds that if you hand cash over to consumers, you're essentially sponsoring cheap importers rather than supporting local job makers. Which, insofar as it's been presented to me 20 years ago, is pretty much what happened after 1979 (in e.g. the US under Carter) and 1987 (in e.g. France under Mitterrand).

On that note, I'd also like to point out that the two options you mention aren't on two ends of a spectrum nor are they the only two competing options. Take, for instance, this unorthodox economist named Steve Keen, author of Debunking Economics. His work latches onto dynamic systems and the kind of stuff that you learn in engineering courses. Any science-educated reader will rapidly see what his points are and grok how mainstream economics seems, well, weird. (If you don't buy his book at least check out his blog or some of his YouTube videos. And if you've time on your hands, check out the couple of lectures on his channel.) At any rate, the point is his recommendation for the last (and future) crisis would have been a private debt jubilee. And he certainly isn't unique in prescribing options that aren't straight out of economic textbooks.

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  • As an addendum, you should look in the Keynesian multiplicator. This stimuli is mostly effective if your economy does not import much. It would be more effective for North Korea than it was for EU. – xrorox Feb 14 '18 at 9:40

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