Keynesian Economics: Planting Apple Trees and Expecting Oranges

In the past, I have always argued that it was the devaluation of the dollar that kept Keynesian fiscal stimulation from truly pulling any economy out of a recession.  I still believe that to be true because massive spending and the resulting weak dollar adversely affect consumer spending.  Then, just last week, I had an epiphany (of sorts) that better explains why Keynesian fiscal stimulation, like the Obama Stimulus Plan, is ineffectual.  It all has to do with apples-and-oranges spending. So, let me explain.

Keynes, like almost every other economist, believed that an economy is driven by two sources of demand (aka spending):  (1) the Private Sector (made up of consumer and business spending) and (2) the Public Sector (made up of spending by federal, state, and local governments).  Further, he correctly believed that recessions are typically caused by a slowdown in private sector spending.  But, where he gets it wrong is in his belief that the federal government should increase spending through work-projects to compensate for the loss of private sector demand. However, the spending for federally-sponsored work projects is nothing like the loss of either consumer or business spending.  Federal projects involve buying massive amounts of things like concrete, asphalt, sand, gravel, steel, etc. along with purchasing heavy equipment to build roads, bridges, airports, or whatever.  Consumers typically spend their money locally on things like entertainment, food, clothing, TV's, and so on.  Five guys, filling potholes, twenty miles away from a restaurant struggling to stay in business isn't going to save that restaurant and its employees from unemployment.  This is why Obama's stimulus hasn't "really" made a single dent in the number of unemployed.  Further, because most federal work programs are so material and equipment intensive, the amount of jobs being created is actually miniscule.  Therefore, no amount of federal projects can truly offset the loss of jobs in the private sector. And, when the project is over or when the stimulus funds dry up, the federally-supported workforce goes back to being unemployed.

In a nutshell, Keynesian fiscal stimulus fails to stimulate the specific sectors of the economy that need to be stimulated to pull the economy out of recession.  And, if the economy does improve while Keynesian stimulus is being applied, its only because the economy is correcting on its own.