Ritesh Barot: Can government spend to trigger growth in demand?

Workers at one of the road construction sites  in Lamu. Government spending is mainly on infrastructure.

Photo credit: File I Nation Media Group

Over time, every capitalist economy goes through cycles that have periods of growth and periods of economic contraction or recessions. These cycles continue, however, the overall trend of an economy is generally upward. The global economy has seen tremendous growth over the last hundred years, albeit, through the experience of booms and busts.

In most of the 19th and 20th centuries during the explosion of capitalistic economies, laissez-faire economics ruled the day with little government intervention in the economy, with some minor tweaks during the progressive era in terms of breaking up monopolies, other than that the government stayed fairly hands off. The great depression in 1929 however changed everything. All of a sudden the leading global economies at the time were seeing at least 25% unemployment and the traditional way of economic thinking was not able to solve the problems of the day.

Economist John Maynard Keynes often regarded as the father of modern macroeconomics focused on theories affecting employment, interest and money. All these are relevant today as the world is battling the effects of the global economic downturn brought on by Covid-19 pandemic, Russia-Ukraine war, geopolitics, food shortages and rising fuel prices.

When we think about Keynesian economics let us think about what actually drives a capitalist economy. One of the most important factors that keeps an economy afloat is if people have money and spend that money on necessities and other purchases. People are buying goods and services, thereby allowing businesses to grow and economies to prosper. With high rates of unemployment, spending in the economy gets negatively impacted. For free-market economics to work people need to be spending as they are driving demand which businesses supply, leading to further employment, expansion, profitability, and prosperity. This is only possible with employment. Keynes devised the economic theory that government should actually spend money during recessions in order to put money back in people's pockets.

In Kenya we are witnessing many mega-projects in progress. The country is geared towards vision 2030. Additionally, many major projects have been underway over the past few years including the Standard Gauge Railway, Lamu-port South Sudan Ethiopia Corridor (Lapsset), Kipevu Oil Terminal, Mega Dams, Northlands City, Konza City, Tatu City, Nairobi-Mombasa highway expansion, Nairobi expressway, Mombasa pot expansion, Major housing projects, and so much more. These projects have generated employment

Where does the government get this money, to begin with? If we are in the middle of a recession the government would receive less money from taxes, so does the government raise taxes during a recession? What Keynes envisioned was that the taxes would be kept low during a recession because that too would help keep some money in people’s pockets that they can spend. During tough economic times, it could be beneficial to do some deficit spending and go into some calculated debt with the intention of paying that debt again when times get better. The Central Bank of Kenya has issued a series of bonds with very attractive yields and the investors have been very keen leading to oversubscriptions.

If we go back to the Great Depression, the American president of the time, Herbert Hoover, believed that free-market principles would rule the day, and eventually, the market would correct itself. As the depression kept getting worse, and unemployment kept rising, it was becoming clear that this old classical way of thinking was not going to solve these issues. When the election happened in 1932, President Franklin Roosevelt won with a massive victory campaigning on what he called “the new deal” where, through massive government spending, people could go back to work and money would be circulating through the economy again. Now under the new deal, Roosevelt promised these massive spending programs in order to put people back to work and get people spending money again. He did this through new government agencies created with the intention of generating employment. These included the National Recovery Administration which tried to get business and labor together to create better working conditions for people and higher wages and more opportunities for employment through the private sector using some government legislation.

The Works Progress Administration was a massive government spending plan whereby billions of dollars were spent on building the interstate system in the United States, building arts and culture infrastructure, and building dams in the Tennessee River valley in order to generate hydroelectric power. All these policies during the great depression were able to lessen the impact of these negative economic effects on people, generate more jobs and therefore get money circulating in the economy.

Ultimately, what brought the United States out of the depression was its participation in the Second World War and all the spending that came along with it. In Kenya today, many projects are underway with large sums of foreign debt. Foreign debt repayment at times of high exchange rates adds to the debt burden.

During the first week of August 2022, one US Dollar traded upward of 119 Kenya Shillings. What is required most is the careful prioritising of the right projects due to the limited resources available as well as accountability. We have witnessed the problems faced by nations burdened with international debt and the compounding effect of inflation and unemployment in Sri Lanka, Lebanon, Mexico and many such nations.

Today, Keynesian economics is still very much alive when recessions happen, one of the major economic trends is for the government to spend money in order to lessen the blow of those recessions. This remains controversial, because again, conventional thinking also goes along the lines that maybe the government should not be spending money during a recession because there is no money to spend. During smaller recessions maybe the economy may not need the government going into further debt. There is constant debate about how much the government should be involved in helping the economy recover from the recession.

Nobel prize-winning Keynesian economic thinker Paul Krugman wrote about Keynes that “now I am not saying that Keynes was right about everything but the essential truth of Keynes’ big idea that an economy can fail if consumers and investors spend too little and that the pursuit of sound money and balanced budgets is sometimes not always folly, is as evident in today’s world as it was in the 1930s. And in these dangerous days, we ignore or reject that idea at the world economy’s peril.”

Barot is a business and financial analyst. Email: [email protected]


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