I found a bit of wishful thinking from the editors of the Wall Street Journal today, pronouncing the death of neo-Keynesianism. After the obligatory sideswipe at George W. Bush the editors continue:
President Obama’s tragic mistake was to blow out the U.S. federal balance sheet on spending that has produced little bang for the buck. The fantastical Keynesian notion (the “multiplier”) that $1 of spending produces $1.50 in growth was long ago demolished by Harvard’s Robert Barro, among others. That $1 in spending has to come from somewhere, which means in taxes or borrowing from productive parts of the private economy. Given that so much of the U.S. stimulus went for transfer payments such as Medicaid and unemployment insurance, the “multiplier” has almost certainly been negative.
With the economy in recession in 2008 and 2009, we argued that some stimulus was justified and an increase in the deficit was understandable and inevitable. However, we also argued that permanent tax cuts aimed at marginal individual and corporate tax rates would have done far more to revive animal spirits, and in our view would have led to a far more robust recovery.
What the world has now reached instead is a Keynesian dead end. We are told to let Congress continue to spend and borrow until the precise moment when Mr. Summers and Mark Zandi and the other architects of our current policy say it is time to raise taxes to reduce the huge deficits and debt that their spending has produced. Meanwhile, individuals and businesses are supposed to be unaffected by the prospect of future tax increases, higher interest rates, and more government control over nearly every area of the economy. Even the CEOs of the Business Roundtable now see the damage this is doing.
In my view the underlying problem is that neither economics nor politics is a science like physics or engineering. Such and such an input will never produce a sustainable predictable output if only because you can’t regulate the inputs properly.
Both will remain crafts, like woodworking. Paying attention to the grain is important and the grain varies with every board.
However, since the thirst for power is infinite and eternal there will always be people promoting swift, easy, painless and bloodless solutions to every problem, bolstered by the very latest in research.