Guest Post: Brilliant Discovery In Economics, US Economy Works On Keynesian Policies

via mickeyman from The World Complex blog.


This paper shows the kind of brilliant research that gets done now that economic commentary is only pursued by Ph.D.s.

In this paper, Johansen and Simonsen (2011) come to the surprising conclusion that (spoiler alert!) the US economy operates on Keynesian principles; which differs significantly from its official policy of creating credit whenever a problem appears.

The principal evidence offered in support of the author's conclusions is the following chart, showing that both the value of the Dow Jones Industrial Average (DJIA) and the amount of public debt have increased logarithmically since the late 18th century. And since correlation implies causation, the rise of the DJIA must be due to the increasing public debt.

Now that we understand how the economy works, it becomes clear how we move forward. Raise public debt. Boost the DJIA! The trickle down effects on the economy shall enrich us all.

Notice how public debt jumps at particular intervals--especially around 1812, 1860, 1914, 1940, and steadily after about 1965. These increases in debt relate to wars, proving the Keynesian adage that war is good for the economy.

Of course there might be a few other variables that increased over the same time, which might also contribute to that rising DJIA. Population increased, as did infrastructure construction and economic activity. Might these factors have influenced the DJIA? Most of that economic activity had nothing to do with wars, but did have a lot do with increasing the American standard of living. Probably the most important factor is the increased availability of cheap energy.

Looking at the chart again, I worry a bit about that last increase in the DJIA just before the end of the chart. Looks like it's about 5x more expensive than the historical trend. Quick! Somebody borrow more money!


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