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R.I.P. Keynesian Stimulus

July 19, 2011

Today’s Washington Post includes an enlightening article titled “The Dangers of Being Wrong on Keynes,” who has long been liberals’ go-to economist on how government spending supposedly creates jobs.  Unfortunately for Keynes fans inside and outside of the Obama Administration, the practical lesson millions of Americans have learned the very hard way is that $1 trillion in Keynesian stimulus has not worked as promised.  Now the debt Democrats’ failed stimulus plan has left in its wake is causing the U.S. to hit its debt limit, and contributing to job loss.

Psychologists have long noted five stages in the grieving process when a loved one passes away.  The same apparently goes for treasured economic theories, as evidenced from the liberal grieving over the failure of their stimulus policies.


Stage 1: Denial

Stimulus opponents simply don’t understand:

“Perhaps the president’s team should have better explained their theories to Cantor. In his book, Cantor goes on to describe Keynesianism as the theory ‘that government can be counted on to spend more wisely than the people.’ He’s wrong — and wrong in a way that’s making it harder to recover from this crisis, and could make it harder to respond to the next one.”  

Keynesian stimulus logic “simply feels wrong to people”:  

“What Keynes told us to do simply feels wrong to people. ‘The central irony of financial crises is that they’re caused by too much borrowing, too much confidence and too much spending, and they’re solved by more confidence, more borrowing and more spending,’ Summers says.”

Stage 2: Anger

We weren’t prepared for the Obama Administration’s stimulus to work…because of the prior Administration and Congress:

“And looking back, we weren’t prepared to go Keynesian. At all. For one thing, if you’re going to spend during downturns, you have to save during expansions. That wasn’t a big part of George W. Bush administration policy, of course.  Another clear takeaway is that formulas are more reliable than Congress. It would be much better if federal support for programs such as Medicaid and unemployment insurance was explicitly tied to the unemployment rate. Hoping Congress will act responsibly over any extended period of time isn’t, as they say, a plan.”

Stage 3: Bargaining

If only we had more to spend, then it would have worked for sure:

“’What I didn’t appreciate was the extent to which we only got one shot on stimulus,’ Romer says. ‘In my mind, we got $800 billion, and surely, if the recession turned out to be worse than we were predicting, we could go back and ask for more. What I failed to anticipate was that in the scenario that we found we needed more, people would be saying that what was happening showed that stimulus, in general, didn’t work.’”

If only we could spend what we had better, then it would have worked for sure:

“And even if Congress was willing to green-light more money, spending it turned out to be harder than the Keynesians had hoped. ‘Anybody who is honest and knowledgeable will say it is harder to move money quickly and well in reality than it is in the textbook model. I don’t think the idea that lots more money could have been moved is credible unless there had been a whole set of prior planning,’ Summers says.”

Stage 4: Depression

“’The polarization of fiscal policy is one of the worst legacies to come out of the recession,’ Romer says, sighing. ‘Before the crisis, there was agreement that what you do when you run out of monetary tools is fiscal stimulus. Suddenly, it’s like we’re back in the 1930s.’”

Stage 5: Acceptance    

“But rather than improving on Keynes, the Republican Party has turned against him and the Democratic Party has stopped trying to defend him, much less continue to implement his recommendations.