Here is the standard Keynesian cargo-cult analysis of our economic woes:
1. The problem is a lack of aggregate demand, i.e. people buying stuff and services.
2. As a result, the economy is running below capacity, i.e. economic output is below potential.
3. The solution is fiscal and monetary stimulus, i.e. the Central State borrowing and spending trillions on politically directed programs and the Federal Reserve printing and injecting trillions of “free money” dollars into the financial sector to boost borrowing and lending.
The cargo-cult program has failed for a number of fundamental reasons. Let’s illuminate these reasons with a few thought experiments.