When I took my economics courses, Keynes was king. Keynesianism was the gospel. There was nothing else. To say We are all Keynesians now was virtually tautological since the only competing view was a command economy like the Soviet Union’s. Monetarism was a clandestine belief, whispered furtively by economists meeting in close recess and secret conclave in a building somewhere at the University of Chicago.
But the king has been dethroned and there are, indeed, competing views. On his blog former Secretary of Labor Robert Reich calls for a lot more Keynesianism, big time deficit spending to boost the economy:
Let me say this as clearly and forcefully as I can: The federal government should be spending even more than it already is on roads and bridges and schools and parks and everything else we need. It should make up for cutbacks at the state level, and then some. This is the only way to put Americans back to work. We did it during the Depression. It was called the WPA.
The conventional wisdom is that trying to help the economy now produces short-term gain at the expense of long-term pain. But as I’ve just pointed out, from the point of view of the nation as a whole that’s not at all how it works. The slump is doing long-term damage to our economy and society, and mitigating that slump will lead to a better future.
What is true is that spending more on recovery and reconstruction would worsen the government’s own fiscal position. But even there, conventional wisdom greatly overstates the case. The true fiscal costs of supporting the economy are surprisingly small.
You see, spending money now means a stronger economy, both in the short run and in the long run. And a stronger economy means more revenues, which offset a large fraction of the upfront cost. Back-of-the-envelope calculations suggest that the offset falls short of 100 percent, so that fiscal stimulus isn’t a complete free lunch. But it costs far less than you’d think from listening to what passes for informed discussion.
As I see it the question is one of empirical facts. Will increased government spending produce more growth in the near term than there would have been otherwise? The economists’ way of saying this is Is the multiplier greater than 1.0? Right now the evidence for that appears to be thin. As I noted in a post yesterday there are differing points of view and some who believe that Dr. Krugman’s and Dr. Reich’s prescription is the wrong one have the numbers to back up their claims. To date what I have seen from those holding Dr. Krugman’s view are attacks on the relevance of their opponents’ data or on their interpretation of the data but I have seen them produce no supportive data of their own. That’s what I’d like to see.
To date in this present economic downturn the results are equivocal at best. We have more unemployment now than those who made the decisions said we’d have. That isn’t equivocal. At this point saying Spend more money! isn’t enough. I want them to prove their claims. I want to know what would disprove their claims.
I care what is right not who is right and I want to know what is effective. I’m willing to work out the political and societal implications later.
As I see it the problem is that economics is stuck in the 16th century. Once upon a time physics and astronomy weren’t merely physical sciences, they were moral statements. Whether the sun moved around the earth or vice versa wasn’t just a question of physical fact, it was a statement about humanity’s place in the universe.
I think that’s where economics is now. We need to get beyond moral economy, the intersection between moral philosophy and economic activity. What are the facts?