Showing posts with label Keynesian economic theory. Show all posts
Showing posts with label Keynesian economic theory. Show all posts

Monday, November 4, 2013

Spurring Economic Development through Exportation of Value-Laden Efficiencies

The authors Ha and Swales (2012) attempt to determine the single-region IO analysis of a stylized export-base model. They found that improvements in value-added efficiencies also improve upon the GNP of countries and the labor market. There were also regional improvements in exportation which helped to sustain growth.

Exports are the underpinning of strong economic activity. The export-base model is a simplified version of the Keynesian demand-driven approach whereby exports and regional productivity are linked. As market demand increases so does the need to produce more products for export. This in turn can increase economic activity to meet market demands.

Generally, when policy makers want to increase exports in the export-based model they introduce and spend money on the port and other export functionality. It is hoped that by reducing the costs through investments that it will make exportation cheaper and encourage more use of the facilities. This has a positive effect but can be limited if the internal regional mechanics are not improved for greater competition.

Exports have an impact on the region. Furthermore, they can also influence surrounding areas that contribute to the exportation of products. There is a separation between domestic production and export production. Export production being that which is sold to other markets while domestic production serves the needs of locals. At times these are blended together because they relate to each other.

Increases in efficiency also increase other areas of the sector. There is a cross-breeding that creates higher levels of adaptation within the market. In turn, increased value-added efficiencies also improved the Scottish Gross National Product. As companies produced more efficient products that were demand laden in the market the wealth of the region increased.

Improvements in the exporting of products are also not the only benefit. The local economy also improves through growth within the labor market. The fundamental aspects of the economy improve through the creation of stronger efficiencies, value-added products, improved exportation, and general employment opportunities.

To further the reports findings, GNP improvements can be fostered through improvements such as deep sea ports that help to create efficiencies in exportation. Yet, in alignment with the report, true improvement is outside massive spending and instead lies in the efficient development of new products and services that improve upon market principles. These improvements enhance the labor market, bring more relevant products to the international market, and create stronger regional growth. Through rejuvenated products and services comes growth.

The simple Keynesian model used to do similar analysis is as follows:


C=Consumer Spending
G=Government Spending
X-M=Exports minus Imports. 

In the model when a shock has occurred government can increase spending to improve other areas. The problem with prolonged government spending is that it throws the equilibrium out of balance as that spending must either be paid for by increasing taxes or increasing debt.  It is better, at least in the long-run, to improve upon the market principles of creating more relevant value-laden products and services for exportation. Improved exportation improves upon the fundamentals of the local economy, improves labor opportunities, increases tax revenues through expanded economic activity, and develop higher levels of sustainable growth. Where government does wish to spur activities it should focus on those areas where it improves upon efficiency for multiple industries such as ports, collaborative development, infrastructure, improved market information, market hubs, drawing foreign investment, educational improvements for labor/innovation development, etc. It is important to remember that government spending and influence should be to improve upon the economic fundamentals and the environment versus short-term purchasing of inefficient economic activity.

Ha, S. & Swales, K. (2012). The export-base model with supply-side stimulus to the export sector. Annals of Regional Science, 49 (2).

Monday, January 14, 2013

Keynesian Theory: Benefits and Detractors

Keynesian economic theory has been under increased scrutiny as the U.S. national debt load increases and the economy suffers from a long period of recession. The theoretical standpoint of the Keynesian model is one of a mixed bag where those elements that would have a positive impact are often drowned out by inefficient governmental waste, political favoritism, and the cost of servicing the debt. Under certain circumstances the policies can help stave off economic collapse but fail to bring about positive benefits the longer it is used.

According to the U.S. Census Bureau an era between 1790's to 1930's only saw deficits in government spending in approximately 38 years. Most of this debt was short-term and a direct result of increased costs of war or economic downturns (Lee, 2012). Total federal budgets ran at approximately 3.2% of GNP when compared to nearly 70% of GNP today (The 2012 Long-Term, 2012). At such a high debt-to-earnings scenario the Keynesian approach loses its power to encourage future economic benefits.

To Dr. Dwight Lee, from the University of Georgia, most recessions were relatively small before the Great Depression of the 1930's (2012). They were small because market forces moved in to clear up slack in the economic system and create more productivity. He further makes the argument that Keynesian economics work best when running a surplus for many years and then used to spur economic growth in a quick paced fashion. However, running a long-term deficit and then applying additional debt on top of old debt creates higher levels of inefficiencies and costs. It dilutes the potential positive power of each dollar spent and increases its costs. 

One problem with Keynesian economics result from the political process that filters effective action through multiple competing interests and short-term results that create fiscal irresponsibility (Lee, 2012). What could have been considered effective government spending is often wasted in unrelated expenditures that do little to solve economic problems. This often occurs as decisions are filtered through the political process and sifted to those who support that process. It is always easier to spend then it is to save or ask for a tax increase.

It can be beneficial to see how poorly designed spending matched with political favoritism can impact the effectiveness of taxpayer liabilities. Accordingly, natural disaster legislation has shown that in the past nearly half of the funds were allocated based upon political interests versus that which actually aligns with the needs of victims (Garrett and Sobel, 2003). Such wasteful activities dilute much of the potential benefits of a stimulus that encourages recovery and growth by inappropriately allocating resources to the least effective entities and pinning them to taxpayer debt. 

It is this political favoritism that has made economic policy more dangerous. For example, the multiplier effect is based upon the concept of Keynes statements, “to dig holes in the ground" can benefit society (Keynes, 1936). In this concept, as money is paid for employment purposes it impacts secondary services through the economic chain passing resources to small businesses, companies, and other entities. However, if only a percentage of that money makes it through to these secondary entities its overall impact is diminished.

The end result of misguided economic applications of Keynes theory will result in higher taxes and greater expenses on debt (Barro, 1974). Someone will need to pay back the money. In most cases it will be the next generation and the one thereafter. The costs associated with debt servicing rises above the original costs creating ever increasing problems for the future. It is this future that is short changed for current needs.

The concepts of Keynesian economics works well under certain circumstances but can be disastrous if inappropriately applied in the long term. Positive applications of Keynesian economics occurs when the nation has been running a surplus for a number of years and uses this surplus to spur economic growth through liquidity that fosters cash flow and lending. Such monies will need to be effectively and efficiently allocated only to those areas where it is likely to have the most beneficial and long-term impact. As political favoritism, debt servicing costs, and inefficiencies rise the effectiveness of the financial economic injection diminishes.When used appropriately with assurances of proper expenditures in strategic entities it has the ability to increase economic activity in the short run.

Key Points:
-Keynesian Economics comes with benefits and risks.
-Money spent should have an immediate impact with long-term potential.
-The economic chain and spending decisions should avoid all waste.
-The cost of debt rises over time.

-Keynesian policies work in the short-run to counter quick shocks to the market.
-Political favoritism diminishes its impact.

-Economic activity would need to pick up much more than the costs associated with debt and misspending when compared to low debt and efficient spending in order to justify such policies. 
-The risks and benefits of using such policies should be carefully analyzed and calculated. 

Garrett, T., and Sobel, R. (2003) The Political Economy of FEMA Disaster Payments. Economic Inquiry 41 (3): 496–509.

Lee, G. (2012).  The Keynesian Path to Fiscal Irresponsibility. Kato Journal, 32 (3).

Keynes, J. M. (1936) The General Theory of Employment, Interest and Money. New York: Harcourt, Brace and Co.

The 2012 Long-Term Budget Outlook. (June 5th, 2012). Congressional Budget Office. Retrieved January 14th, 2013 from