That feels like the wrong lesson. Surely during downturns you want to government to step up spending to stabilise the economy, and to get safe bonds out on the market to compensate for stock market downturn?
> Surely during downturns you want to government to step up spending to stabilise the economy
That model might work if they cut spending during good times.
As is, the modern government spending model is that they (almost) constantly increase whether things are going well or poorly. Then the next time there's a downtown, government spending as a portion of the (shrinking) economy is a higher % and therefore it takes more to "stabilize" it this time around.
Think of driving down the road. If it's a normal straight road in good weather, you minimally adjust the wheel back and forth and if something happens, you have many degrees of freedom and even momentum pointing you in the right direction.
Now think of a road at night in a storm with lots of curves. As you tighten your hands on the wheel and steer back and forth, things are quite a bit different. The direction you want to go now vs 10 seconds from now are a little different. And a disruption - however so small - may need a bigger reaction to avoid and a bigger after-reaction to recover. Momentum can easily work against you.
>hat feels like the wrong lesson. Surely during downturns you want to government to step up spending to stabilise the economy, and to get safe bonds out on the market to compensate for stock market downturn?
Nope. Keynes himself created this idea and then disproved it. There's 1 key factor of why this fails EVERYTIME.
Lets say the downturn was just the uranium mining industry. Government comes in, adds spending to stabilize. Then you ASSUME the government will stop once the issue is over. Nope. Never ever does. Politicians who created the subsidy move on to other issues and those temporary government measures become permanent.
This is a big gap for the difference between theory and practice.
On occasion you'll hear about the need to end corporate welfare. Nobody ever actually does it, but then when that industry bounces back, they are supercharged by free subsidies. Then the next politician is told, you can cut but it's going to cause people to lose jobs. Which is true.
Government should never be in this business to start with.
That model might work if they cut spending during good times.
As is, the modern government spending model is that they (almost) constantly increase whether things are going well or poorly. Then the next time there's a downtown, government spending as a portion of the (shrinking) economy is a higher % and therefore it takes more to "stabilize" it this time around.
Think of driving down the road. If it's a normal straight road in good weather, you minimally adjust the wheel back and forth and if something happens, you have many degrees of freedom and even momentum pointing you in the right direction.
Now think of a road at night in a storm with lots of curves. As you tighten your hands on the wheel and steer back and forth, things are quite a bit different. The direction you want to go now vs 10 seconds from now are a little different. And a disruption - however so small - may need a bigger reaction to avoid and a bigger after-reaction to recover. Momentum can easily work against you.