Friday, May 18, 2012

Tim Worstall Nails the Problem with Keynesian Macro


… It’s the politics of Keynesianism that clearly does not work. Doesn’t in fact matter whether it actually works as economics, the incentives to politicians mean that it never will work in practice. [emphasis added]

I’ve been making bits and pieces of this point for 20 years.*

Today, I have lots of students who come in to class with a predisposition to believing that there is no truth at all to the Keynesian paradigm. I think the work of new classical economists over the last 40 years has established that while the Keynesian prescription is not particularly powerful, it’s effects in practice are not zero. But probably not large enough to seriously worry about either.

So, Keynes and Keynesians are, at a minimum, at least a little bit right about the economics.

Now it’s important to put a tiny digression right here: macroeconomists of the last generation have also established the primacy of the “low tech” of culture and social institutions for explaining the lion’s share of individual well-being.

Back to Keynesian macro, and how politicians actually practice it:

Let us, for a moment, accept the basic Keynesian premise, that we should run great big stonking deficits to provide fiscal stimulus in the middle of a recession/depression.

That also means that we should run great big stonking budget surpluses in the middle to end periods of the largest and longest economic booms in advanced country history.

They don’t quite have to be symmetrical …

But there does have to be … some connection between the general size of them.

Now, look around you, we’ve got countries that are, or have been, running deficits of 5, 10, 15% of GDP …

OK, hands up, who can imagine anyone running a 2 or even 3% budget surplus consistently for some years, let alone 5 or 10%?

And that’s the rub: politicians everywhere claim that we are permanently in a position where they can ignore half the theory that’s a little bit correct, and all of the theory that explains the rest.

* Anyone who thinks I’m coming at this from a non-Keynesian perspective ought to go and read my dissertation. It’s pretty pure Keynesianism that I outgrew. Unfortunately, given the revival of stimulus spending, it’s actually started to get cited in the literature again. Pity those poor fools don’t actually call the author; he might tell them the flaws.

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