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.