Has Keynesian Economics Finally Jumped the Shark? by Dan Mitchell

If everyone has a cross to bear in life, mine is the perplexing durability of Keynesian economics.

I thought the idea was dead when Keynesians incorrectly said you couldn’t have simultaneously rising inflation and unemployment like we saw in the 1970s.

Then I thought the idea was buried even deeper when the Keynesians were wrong about simultaneously falling inflation and unemployment like we saw in the 1980s.

I also believed that the idea was discredited because Keynesian stimulus schemes didn’t work for Hoover and Roosevelt in the 1930s. They didn’t work for Japan in the 1990s. And they didn’t work for Bush or Obama in recent years.

Last but not least, I figured Keynesian economics no longer would pass the laugh test because of some very silly statements by Paul Krugman.

He stated a couple of years ago that it would be good for growth if everyone thought the world was going to be attacked by aliens because that would trigger massive military outlays.

He also asserted more recently that a war would be very beneficial to the economy.

Equally bizarre, he really said that the terrorist attacks on the World Trade Center would “do some economic good” because of the subsequent money spent on rebuilding.

Wow. I guess the moral of the story is that we should destroy lots of wealth because it’s good for prosperity. Just like we should eat more cheeseburgers to lose weight.

So you can see why I’m frustrated. It seems that evidence and logic don’t matter in this debate.

But maybe this latest example of Keynesian malpractice will finally open some eyes. The International Monetary Fund recently published a study asserting that higher spending on refugees would be good for European economies.

I’m not joking. Here are some excerpts from that report.

In the short term, the macroeconomic effect from the refugee surge is likely to be a modest increase in GDP growth, reflecting the fiscal expansion associated with support to the asylum seekers… In the short term, additional public spending for the provision of first reception and support services to asylum seekers, such as housing, food, health and education, will increase aggregate demand. …Relative to the baseline, the level of GDP is lifted by about 0.05, 0.09, and 0.13 percent for 2015, 2016, and 2017, respectively (solid line in the chart below, representing the response of EU GDP as a whole). For the first year, the output impact is entirely due to the aggregate demand impact of the additional fiscal spending.

The rest of the article can be read here.

I would add the events of 1946 to Mitchell’s list of failed Keynesian predictions. As World War 2 was winding down in 1945, it was common knowledge that wartime spending had not ended the Great Depression, although such knowledge was subsequently forgotten. Thus many economists were anticipating a return of depression conditions once the troops returned home and the armaments factories closed. The recommendations to combat such an outcome involved Keynesian remedies of massive public works spending. Fortunately the country had had enough of astronomical deficits and taxes so such ideas were not implemented. Instead, government spending collapsed, many price controls were repealed, and the general hostility to business of FDR’s administration ended. The result was the single greatest year of economic output in US history.

The Keynesians failed to realize that there was an enormous pent up demand for consumer goods and services that entrepreneurs would rush to meet. During the war, many consumer goods were rationed, others were not being produced. Also, men subject to the draft delayed having children until after the war. This resulted in an enormous baby boom when the war ended. Finally, FDR’s relentless war on business had resulted in a collapse of private sector investment. His death and the end of the war gave investors confidence to invest.

The post World War 2 economic boom should have buried Keynesianism. However, while Keynesianism can go into decline, as it did in the 1970s, it can never be truly dead and buried as it provides politicians with pseudo intellectual cover for doing what they always want to do: spend money to buy votes and pay off bribes.

This entry was posted in Political_Economy and tagged . Bookmark the permalink.