For those who accept our assessment that the world is in an economic depression, which we dubbed Depression 2.0, there must be a solution that will bring the economy to recovery. Did John Maynard Keynes have the answer?

The question first must be whether the national and global economies are simply in a slow-down or correction for the last decade of “irrational exuberance” or, whether we’re experiencing a true economic depression?

If you believe that this is simply a slow-down or recession, then the one solution may be to allow market forces to take their time and process to resolve itself.

However, if you define economic depression, as we do, as a combination of downward economic trends compounded by the loss of faith in the financial systems, then yes, we are in an economic depression and thus the solution will be different.

Though John Maynard Keynes was a brilliant British economist, perhaps the best of the 20th Century, his views about recovery from recessions, depressions and booms remain controversial. He advocated an interventionist policy, by which government would use fiscal and monetary measures to mitigate the adverse reactions on the economy of severe periods.

So where does Keynesian economic theory apply in today’s economic condition? For one thing, Federal Reserve Chairman Ben Bernanke and to some great extent present Treasury Secretary Hank Paulson are at present, implementing a Keynesian solution to the problems we face today. They are using both TARP funds as well as the balance sheet of the Federal Reserve to offset losses in the financial markets or to stimulate the financial industry.

This is classic Keynesian theory implemented in reality, however, it’s insufficient to complete the job. Enter a new President, Barack Obama, who has already stated his intention to pass an economic stimulus package to invest in infrastructure and business to spur recovery, as well as investing in new energy technologies to spur growth.

Even our Capital Injection Program for the banks was rooted in Keynesian theory, by seeking to put capital directly on the balance sheets of banks so they could lend once more. It is a shame that the Treasury officials implementing that program did so in a manner that was, to say the least, lacking in the spirit of the program.

But how much intervention will U.S. government need to do before the American economy recovers?

Well, we have a theory of our own. In fact, Dr. Robert Angelone has theorized that the value of investment in the economy required to facilitate a Keynesian solution is equal to no less than 50% of GDP, and more likely 125% of GDP. So, if GDP was, for a round number, $13.5 Trillion, then government will likely have to invest between $6.75 Trillion and $16.875 Trillion. At the time of this publication, we’re already at about $2.5 Trillion.

Have sticker shock yet? Do you fear the impact on future generations? Well don’t break a sweat.

If the U.S. government were to implement economic stimulus incentives the tax revenue base would grow, rather than its present state of decline. That would put additional money into the Treasury and allow government to offset the costs of the recovery. Since government bonds are yielding 0% or less, the government is in effect, able to borrow at no cost.

Why so much, you ask?  Well, this is where the Keynesian solution gets very tricky, particularly in a depressed economy.

Government must first spend heavily to shore up the financial system, creating a safer, more secure environment for those in that system. People must be comfortable making deposits, investments, loans and credit-based purchases such as homes and autos. Next, the government must shore up the real estate market, and may be required to simply buy up a great deal of property in order for it to be taken off the books of those who bought the mortgage backed securities.* 

Then there is the necessary economic stimulus, where government must invest heavily to create jobs, stabilize businesses and create economic growth. This is where it gets most expensive. It will include bailing out most of the states, funding research, and establishing career training and re-training, and building all-new industries.

After the economic recession of the late 1950’s, President John F. Kennedy implemented a Keynesian model when he put forth his bold plan to put a man on the moon. Massive government spending established new companies, industries and technologies. An example of this is Texas Instruments, which capitalized on the need for calculators by NASA engineers, capable of doing complex mathematical formulae.

From that came the personal computer industry, software and eventually, the Internet and mobile communications.

An ancient precept of economic recovery postulates that the solution to recession or depression is war. It is not the battle that actually produces the economic recovery, but the government spending to fund the battle.

Keynes also applied his theory to booms, with the expectation that they pose the risk of creating economic bubbles that when burst, create more serious problems. Unfortunately, the risk government faces by application of Dr. Keynes theory on the downside is that if it fails to implement interventionist philosophy on the upside, it fundamentally creates the next economic crisis on the downside.

This is what happened in the 1990’s and early 21st Century, as history will note. The Internet bubble, compounded by the housing bubble was poorly managed by government because ultimately, the public, in a free-market economy doesn’t want economic intervention on the upswing. That means slowing down the creation of individual wealth.

That slowdown is necessary. So we propose that government create a growth tax, which would slow growth to more practical levels. Government should tax rapid growth in wealth, simply to prevent that growth from becoming excessive.

Had government intervened with a high tax rate on oil profits, not merely on oil companies, but on speculators, the incentive to speculate would have been rapidly diminished and the market would have been stabilized. Oil prices might still have risen, but at a more steady, practical pace.

When will this end? That’s hard to say, but recovery from this crisis could take years and we seriously suspect that the next decade will largely be lost to economic problems. A bitter pill, no doubt, but one we must collectively swallow for our own good.