"The Keynesian economists correctly argue that during a recession, individual and business spending and investment is below that required for full employment. Their solution is to increase government spending to make up for the shortfall in private spending.

The Chicago/Austrian economists will properly argue that any increase in government spending will ultimately have to be paid for by higher present or future taxes, or inflation (which reduces the value of the money). The Keynesians will reply that if there is unused labor and capital, and if government spending can utilize this labor and capital surplus, GDP and the tax base will be larger. Also, the gains from the increased employment and higher tax revenues may exceed the long run costs (and particularly the human costs from unemployment) of waiting until the business cycle naturally corrects itself.

In theory, if the increased government spending is only utilized on projects where the benefits of the venture exceed the costs of the additional inflation and net tax burden, the Keynesians' call for more spending could have merit. (In the 1930s, it was argued by many that even if the government only employed people to dig holes and then fill them in, the economy would be better off. Most modern Keynesians no longer advocate such wasted effort, which clearly did not work.)"

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Thanks, David.