I believe we're about to enter a second recession, not because of our defeceit spending, that was intended for a short period of time, versus Europe's, which was undertaken for years, before the recession.

Inflationary policies, when the economy is already is in its long term output, is not Keynesian. Keyensianism accepts NAIRU and that all such things can do is cause inflation. It also is simply common sense that you can't run defeceits forever, and that you need to have surpluses. All I'm saying is it makes no sense to try to balance the budget, in the worst time possible. It's so counter intuitive.

All this boils down to, I think, is your reluctance to identify yourself, what a "normal" fix is. It seems that you yourself don't understand what it means. I believe that recessions are primarily caused by demand shocks. Although such shocks may have been caused by things such as the housing bubble, the dividends bullshit, etc, such things aren't the actual cause of the recession. A crash in the stock market or real estate market, affects your wealth, but with sticky wages, shouldn't affect your income. There is a reduction in wealth, but everyone should still be able to buy the same ammount of stuff they bought. And what happens when we lose a bunch of wealth? We cut back on spending, consumer spending.

Until consumer confidence returns, and it will, I believe it makes sense for government to lower taxes, give stimulus packages, cut interest rates, and increase government spending. Such things will increase output to its normal level, get producers to continue producing instead of liquidating their capital, get people to keep getting their paychecks, and hasten the recovery of consumer confidence.

Once consumer confidence returns, and consumer spending returns to its normal level, then the government can cut back, and begin to worry about raising taxes, interest rates, cutting transfers and spending.

Government spending can't help regain consumer spending due to demand shocks.  Do people buy more due to the government spending?  Yes... then as soon as the government spending stops... they stop buying.

After that tax credit is gone for new cars... nobody wants to buy new cars.  Once the government cuts back, consumer spending and confidence drops back down... because, surprise surpise the reasons to buy no longer exist.

All government spending does is push demand foward, and create a gap later, that requires organic consumer confidence to build back up.

Or to put it another way... I usually buy something weekly for 10 dollars.

A recession happens so I stop buying it.

The government decides to offer to go "halfises with me" now it only costs me 5 dollars to buy the thing that used to call me 10 dollars.

The government pulls away the deal.  I stop buying the thing because it now costs me 10 dollars.   Why would I spend 10 dollars when it used to cost me 5?  So now they have to lower the price to 5 to get my money back... problem is, this widget could cost 7.

Government intervention like that only devalues products and creates a new demand shock whenever it's pulled away.  One that is MUCH harder to overcome, because NOW it is a value perception, rather then a perception of supply perception.

As for the "fix" I didn't mention it... because it goes without saying.

You allow confidence in the economy to grow, if that's the particular kind of depression your tackling. You are wrong on that... there are many reasons and ways depressions can happen.

Demand shock is only one of many.

Consumer confidence on an individual level comes from having secure employment that provides enough income to adequately cover necessary expenses with enough money left over to purchase unnecessary items. While a person’s income is temporary restored by being employed by a stimulus project, their job isn’t secure because when the funding disappears they will be unemployed again; and the individual who is indirectly associated to the stimulus project knows that when the project goes away their income will return to the pre-stimulus levels. When you look at the economy on a whole, the awareness of the temporary nature of stimulus spending ensures that consumer confidence never returns to pre-recession levels.

Now, a responsible Keynesian may advocate saving money in good times to spend it during bad times but this is still results in stimulus spending being (very) temporary and will result in lower economic output during the good times. Eventually, the government will run out of saved money and they will have to stop the stimulus spending and return to surplus budgets in order to rebuild their reserves. An important question that needs to be answered in this case is where does a massive economy like the United States (or worse yet, the combined economy of the western world) invest their money in the "Good Times" that would retain value in the "Bad Times"?

Basically, the problem is that when the government is purchasing investments those investments will be overvalued due to the influence of the government in the market, and when the government is selling those investments to recover money those investments will become undervalued; and when this behaviour is being followed by all major economies the distortion of the value of the investment will be far more dramatic. If you’re buying an investment at $1000 per unit in good times to sell it for $100 per unit in bad times how much higher do your taxes have to be to cover a stimulus of 10% of GDP for 2 years every 20 years?

No... the concept that Keynesian uses as a pillar is sticky wages. Keyensianism isn't trying to restore confidence by raising income through stimulus. A stimulus is only a way to increase production and consumption, to ensure that busineeses ride the demand shock, continue to invest, continue to employ as much, etc. When people feel that the economy as a whole is stable and growing again, they will feel confident. They will feel their life time wages have increased again.

I think it's a good thing that there isn't huge growth. I'll rather have a growth that's close to the long term rate, so that when there's the next recession it'll be smaller and shorter. Being so anti-Keynesian, you should also be advocating contractionary policies during economic expansions... your question is irrelevant if you, like me, believe that the government doesn't need to worry about creating growth, just making sure economies get back to normal rates, and then simply prevent it from growing too much (which is easy, just tax, raise interest rates, etc)

The investment spending is, you and me agree, buying capital. We buy capital, to replace old ones, and in expectation of more demand. When there is a demand shock, the government simply steps in, for the consumer, and demands products. Liquidation and a reduction in production capicity, as well as unemployment, is minimized.

Because of this, consumer confidence will be regained faster, due to people feeling confident that the economy is growing and good. People then begin to spend more of their income. The government gradually lowers its own demand for products, while consumer increases their own. It's simply a trade off. By the end of it, if the government only demanded as much as the long term output, consumers will demand as much to get back to the long term output, and it'll be the same thing.

As for your last point... so you believe that if you simply let stuff go, consumer confidence will return, but with Keyensian policies, consumer confidence won't return within 20 years? O.o Yeah, liquidation of capital, jobs, crashing of financial institutes, freezing of credit, etc, sure will make us confident within 20 years...

I think you missed my point. If you are unemployed and I give you a job for a year digging ditches and then filling them in again what is the likelihood that you’re going to spend the excess money you earned on goods and services you truly don’t need? Being that you know that you’re going to be unemployed in a year I would suspect that you would probably save most of the money you didn’t require for necessary expenses. Even if you’re earning the exact same amount you were prior to the recession you’re going to be far more likely to save your money or pay down debt than to buy additional goods and services. When the year is over and you’re unemployed again the economic growth from the project is gone, there is no residual value from it, and since spending never recovered there are no new private sector jobs to go to; and you’re back at square one all over again, with the exception that the government spent a whole lot of money.

You don’t solve a problem with sticky prices by preventing the prices from falling by paying people to do meaningless work; and this is exactly what John Maynard Keynes advocated. The only way to improve consumer confidence long term, and to truly recover from an economic downturn, is for the private sector to recover and start producing stable full time positions at a rate faster than population growth.

Now, I don’t advocate for contractionary or expansionary policies by the government at anytime; and the only role the government has in the economy is in regulation and oversight designed to prevent dangerous behaviours from existing (or becoming wide spread). Taxes and spending should be very stable; and total government spending should be (roughly) 19% of the 5 year floating average of GDP, and taxes should be 20% of GDP. If bubbles are not forming from artificially low interest rates and government supported loose lending practices the economic downturn should not be significant enough to threaten the entire economy as a whole.

Such programs aren't really done for the sake of the ditch workers, but more for the coffee shops that they go to. If that makes sense. If it's come to the point that the government has to employ everybody, that simply means that the long term output has shifted leftwards already, and it is too late.

Hmmm, I'm not an expert on the Great Depression, but only learned the basic theory of discretionary policies. However, forgetting extreme cases like the great depression, I think it makes sense for there to be stimuluses and government spending when there's a recession that can't be solved by monetary policy.

I think it's too simple to say that bubbles, and moreover recessions, can be prevented like that. How did you come up with those percentages?

So, as a coffee shop owner you notice that a large portion of your customers work as ditch diggers and will only be employed for one year. Knowing full well that their project will be completed in a year and they won’t regain employment are you going to spend your excess income to expand your business or are you going to save it for when these new customers disappear?

Now, first off Monetary policy can not be used to fix problems in the economy it can only be used to create inflation and rob individuals of their savings. Besides that, if it wasn’t for inflationary monetary policies, lax regulation or government policies that support risk the market could not become so dangerously inflated that the economy would need government (or central bank) intervention to recover. Basically, if it wasn’t for the Federal Reserve giving away “Free” money, Fannie Mae and Freddie Mac buying garbage mortgages, and bakers being allowed to create overly complicated mortgage derivatives there is no way that the housing bubble could have ever inflated to the extent that it had.

Central Bank and Government intervention in the economy is the problem, not the solution.

Anyways, the tax rate comes from Hauser's Law which (basically) states that regardless of what the marginal tax rate is, the revenue collected by the government through taxation stays at (roughly) 19.5% of GDP.

But it's not the suppliers we're really worried about. They always react to demand. The government will keep demanding, until the consumers begin to demand. When the consumers demand, the government lets them take over.

But if there was an AD shift, there would be disinflation, and therefore a inflationary policy will only bring back inflation levels to pre-inflation levels. And once the economy has gotten better there should have been contractionary monetary policy. I would say that what you're discribing is the government engaging in expansionary policy when the economy was already in long term output.

Dunno about the law, but taxes are only one portion. You can stimulate the economy besides increasing consumer spending through tax cuts.

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