U.S. Election Will Go the Way of the U.S. Economy, But Why?: Part IV of VII

Difficulty Number One

The first problem with converting Keynesian theory to Keynesian practice relates to the “lag factor” described above. Here, in order for a central bank or central government to intervene effectively, there must be a relatively accurate sense of what is actually occurring at a particular time within an economy. Yet because data cannot be assessed until after they are collected and processed, they will inevitably represent snapshots of the past to some degree; hence they are revised regularly once more-complete data come in and/or more-thorough analyses take place. And meanwhile, any policy changes will not have their effects felt until some time in the future. So even if economic trends could be reliably established in the short term, the chance of trend shifts and even reversals could be considerable in many cases. After all, it was the very cyclicity of the marketplace that was Keynes’ inspiration in the first place. And perhaps most important when it comes to attempting to anticipate and counter market cyclicity: to get it wrong can not only perturb market self-correction; it can easily amplify the cyclicity one is trying to eliminate—as found in wave dynamics of all persuasions.

Difficulty Number Two

The second problem with converting Keynesian theory to Keynesian practice relates to the “interactive factor” described above. That is, there are so many variables in play that it is difficult to know how they are interacting with respect to cause and correlation, which renders using observations of the past events to predict future events all the more difficult still.

Difficulty Number Three

The third problem with converting Keynesian theory to Keynesian practice is that all the factors described above render it very difficult to know how much intervention will be required to counteract an anticipated cycle. And of course, given such room for error with all these factors considered, erring on the high side could prove catastrophic with regard to economic stability. For an apt metaphor we can consider what can happen when controlling an aircraft. Here, a pilot’s repetitive over-corrections, or corrections where none are required in the first place, can lead to what is known as pilot-induced oscillation (PIO), something that on more than one occasion has led to the death of all onboard.

Difficulty Number Four

Doubtless the greatest problem with Keynesian economic theory is that it requires the government to fuel a sputtering economy via government injected and directed “stimulus.” The first reason this is problematic relates to the source of the stimulus involved, as the funds must be raised from increased taxes, increased borrowing, and/or printing more money.

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