Obama’s keynesian experiment

This could get embarrassing.  Economists please look away.   Read on only if you’ve found some of the recent discourse over stimulus spending really very odd and even bizarre.

“Why in the world do so many politicians and commentators insist that we need to lower taxes when doing that seems to be part of what’s created the current fiscal mess,” some of us are asking ourselves.  Commentators sometimes present the situation as an inability of Republicans to admit they were wrong.  But that explanation is itself very puzzling.  Of course, we know the lemming phenomenon, but is  that really the best account possibly of the love of lower taxes?

One answer appeals to a fight between two very general economic stands:  the  keynesians and the non-keynesians.  You add in that Keynes is considered somewhat discredited and that monetary policy for decades has largely been a matter of adjusting interest rates.  You can find a very clear statement of it here.  For example,

The Keynesians and anti-Keynesians fought some bitter battles through the 1980s. But by the time of the Clinton administration, most economists agreed on the basics: Some of Keynes’ ideas are useful, but in a post-Keynesian world, the interest rate is the most effective tool.

This view held sway until a month ago — Dec. 16, 2008, to be precise. That’s the day the Federal Reserve tried to stabilize the economy by lowering the interest rate all the way down to zero percent. The Fed can’t go lower, but the economy has kept worsening. The one effective tool seemed to have stopped working.

I can’t provide a critique of this explanation on my own.  The most I can say is that some very distinguished economists appear to agree with the narrative, including this year’s Nobel Prize winner, Paul Krugman.  And here’s the bottom line; despite what is said about Roosevelt, no government has tried to spend its way out of a recession the  way Obama is intending to do, and the way Keynes recommended.  We are watching a very grand experiment.

And it is scary.   Which certainly does not mean that I-don’t-understand-economics McCain would be better.

If this looks all wrong to you, please let us know.

6 thoughts on “Obama’s keynesian experiment

  1. I’m not an economist at all, but that sounds more or less right. (My understanding was that economists started worrying about the interest rate approach when low interest rates failed to pull Japan out of its slump a while back, but 2008 certainly seems to have killed it entirely.) And it’s scarier when you realize that if Krugman’s view is right the entire New Deal was insufficient spending; Japan’s massive spending in response to its recession, which made it the most indebted nation in the developed world, was insufficient spending; and that to be sufficient the spending has to be a set of projects that together are, at minimum, on the size of World War II, economically speaking. It boggles the mind. And it’s hard to see that economists at this point are doing any more than making educated guesses. We can be glad they’re educated rather than uneducated guesses, but that doesn’t take away the scariness of these apparently being guesses. Megan McArdle had a post summing this up recently.

    It’s one of those times when it’s just plain hard to know what the best course of action would be, especially for us non-experts (in part because it’s a time when it’s hard for the experts as well).

  2. Japan has also had a problem with cutting interest rates not working. They hit zero percent interest rates back in the 90s, but their economy never really got back to full capacity.

  3. Oops, I didn’t see Brandon’s comment when I gave mine.

    McArdle is an interesting person to follow in the debate. She’s a libertarian and skeptical about the stimulus, but she also acknowledges that we don’t have a lot of other options to try to get out of the mess we’re in. I think she said she would have held her nose and voted for it as a Senator, but she wasn’t especially pleased with the bill as it came out.

  4. For “non-keynsians,” can we sub “neo-liberals”? I think that it is worth remembering how we got were we are in the first place.

    I was also frustrated by the seeming intractability of the devotion to lower taxes, but I think that the taxes in question will be lower for some, and higher for others, not lower across the board. Which seems fine for the short-term, and perhaps for more sustainable growth in the long term. (but again, also not an economist, though i have learned a lot lo these last few months!).

    Otherwise I think that this is pretty right as well. Monetary policy has failed; we must try something else if we are to get out of this. And it is scary, but it is the situation we are in now which is just as scary; the experiment has to be scary enough to meet the situation.

  5. There is a third camp, the Austrians, who claim that interest rate intervention itself causes the boom bust cycle and furthermore is anti Keynesian.

    The way the market is moving this may be more accurate as it appears both stimulus and zero interest have failed.

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