Let's first highlight a few of the more noted Keynesian concepts working through today's headlines.
- Animal Spirits: the confidence level of market participants, and their willingness to commit risk capital
- Countercyclical Policy: government intervention that slows down or stimulates an economy
- Liquidity Trap: the situation in which monetary policy is no longer effective
- Multiplier Effect: how much government spending increases national income
- Paradox of Thrift: slowing economic growth that comes from consumers saving too much and not spending
No doubt, policymakers do favor certain theories, especially during periods of inflection when "getting it right" means an extended pass on political livelihood.
With today's signing of the fiscal stimulus bill, the shift to Keynesian theory is complete (though not absolute), having begun during the Bush administration.
If, however, the economic result does not meet the electorate's expectations, expect immediate, widespread political upheaval. For example, countercylical policy fails or only partly resolves the paradox of thrift; the multiplier effect does not ignite animal spirits; and from the liquidity traps springs forth inflation or, worse, stagflation.
Over the coming months, look for policymakers to manage these expectations, perhaps even advocating a more absolute approach.
The question is, Does the electorate have the income and net worth to stomach the rhetoric?