The idea is that the increased government spending and deficits will increase demand in the economy for more production, and that producers will increase supply to meet that demand, hiring more workers and reducing unemployment in the process. Keynesian economics arose in the 1930s in response to the Depression. It never worked then, as the recession of 1929 extended into the decade long Great Depression. And it never worked anywhere it's been tried since then, in the U.S. or abroad.
By the 1970s, Keynesian policies had produced double digit unemployment, double digit inflation, and double digit interest rates, all at the same time, along with four successive worsening recessions from 1969 to 1982. Keynesian monetary policy involves running up the money supply to increase demand, with artificially lowered interest rates promoting more spending. That is where the inflation came from.
Ronald Reagan explicitly scrapped Keynesian economics for the more modern supply side economics, which holds that economic growth results from incentives meant to boost production. That results from reduced tax rates, which enable producers to keep a higher proportion of what they produce. It results from reduced regulatory costs, which also increases the net reward for increased production. And it results from monetary policies maintaining a strong, stable dollar, without inflation, which assures investors that the value of their investments will not be depreciated by inflation or a falling dollar, or threatened by repeated recessions resulting from policy induced boom/bust cycles, as in the 1970s.
The results of these Reagan supply side policies have been recounted in several prior columns,and in thorough detail in my 2011 book America's Ticking Bankruptcy Bomb. Inflation was quickly whipped, cut in half by 1982, and in half again by 1983, never to be heard from again until recently. At the same time (which the Washington establishment said was impossible simultaneously), the economy took off on a 25-year economic boom from 1982 to 2007, interrupted by just two, short, shallow recessions, widely recognized in the economic literature, and by the National Bureau of Economic Research, as one long boom. During the first 7 years of that boom alone, the economy grew by almost one-third, the equivalent of adding the entire economy of West Germany, the third largest in the world at the time, to the U.S. economy.
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