Keynes: The great debate

As an economics major i was very excited to see the topic for class tomorrow. However as a budding young economist i have not yet developed deep rooted opinions on how a national economy should be dealt with and how public policy should be taken care of. I have learned in the past however about Keynesian Economics and that John Keynes is considered the most important economic mind since Adam Smith. After reading the assigned excerpts for the day i wanted to get some opinions on said economic theories. i found two politically charged blogs that were violently against the Keynesian economics. Here's why:

Many of you know that in contrast to Adam Smith, John Keynes did not advocate total removal from the market forces. but instead showed how government spending and policy can smooth out the cyclical economy, both in times of recession and in times of economic booms. In a nutshell government spends more and lowers interest rates during recession so that people will have more money to spend and less reason to save. then during booms the government raises interest and increases taxes to make back the deficit from the recession. However his ideas are not as widely accepted as i had once thought. I found a blog call Political Wag. The post i read was called Keynesian Economics is a Failure (any chance this is unbiased?).

The argument the blog poses has many points. It states that most deficits and recessions are caused by governments in the first place. "Business cycles have historically been caused by governments, and they are usually a response to government policies to increase the size of the state through trade barriers, higher taxation, more spending, more regulation and programs of fear and compliance" So government spending would only make the situation working. it further states "Government cannot create new purchasing power out of thin air. If Congress funds new spending with taxes, it is simply redistributing existing income. If Congress instead borrows the money from domestic investors, those investors will have that much less to invest or to spend in the private economy. If Congress borrows the money from foreigners, the balance of payments will adjust by equally reducing net exports, leaving GDP unchanged. Every dollar Congress spends must first come from somewhere else. This does not mean that government spending has no economic impact at all. Government spending often alters the consumption of total demand, such as increasing consumption at the expense of investment." In other words even if the government were to supply money into the market the total change in benefits would net at zero because you would be taking strength away from another part of the economy.

It argues that true increase in wealth comes from increasing production of goods and services and not from simply redistributing existing income. But the most compelling statement to me came in a response to the post itself: "The biggest problem with the application of Keynes (as explained by an economics prof of mine in college) is that we have really only applied part of it. In bad economic times, governments should increase spending in the form of public works, and infrastructure projects, reduce taxes and incur debt to do so. The other side is in strong economic times the government should raise taxes and build a financial surplus as insurance for the next down turn. We never seem to get around to the latter." I think he makes a good point. if the government would stay balanced and disciplined in exercising keynesian policy it would make a big difference. but this is easier said than done.
Then i found a real application of such shortcomings in the Keynesian economic model. I found this blog which quotes a real news story. the problem is that because of government spending and printing of money the US dollar has depreciated significantly. as a result many countries are thinking about discontinuing use of the Dollar as the currency for Oil exchange. This would be a huge shift in traditional oil trade and would have a big influence on the oil prices and our influence over the market. it is pretty interesting stuff.