You are making this much more complicated, and ideolgical, than it needs to be. Keynes advocated stimulating aggregate demand, whether consumption, investment, or government during the Great Depression, i.e., when output fell well short of potential. His theory was that to expand output when there was so much slack in the economy would not be inflationary–indeed deflation was the problem back then. There is increasing debate among economists now as to how well that really worked (See Amity Schales’ book, The Forgotten Man). After all, unemployment was still 17% in 1939.
Today’s politicians latch on to Keynesian theory as an excuse to expand government and give it a theoretical justification. But we are increasingly looking at the behavioral effects of government policies and discovering that they can be both large and harmful. Looking back at two years of TARP, cash for clunkers, subsidies for GM, green initiatives, proposed tax hikes, we can see that businesses and consumers are rightfully afraid of their future. Businesses can’t predict their future costs or regulatory environment, so they sit on their cash hoard. Yes, they are fraidy-cats.
From your comments we would agree that the boom of the Bush years was an artificial one–fueled by easy money, overleveraging by consumers, banks, businesses and other assorted culprits. Plenty of blame to go around. And our current problems are prolonged and deep because we are in the painful deleveraging process.
We’d also probably agree that capitalists want to do what it takes to maximize profits in the future–that’s what makes for hiring and spending if conditions are right. Which is why I don’t understand your statement that “…it has zero to do with government policies and regulations.” If you believe that then you probably have never started a business or hired a work force.
