More Perspective on Keynesianism's Failures

Ike Brannon, a former Senior Advisor of the U.S. Treasury and Chris Edwards of the Cato Institute wrote a short article in the Cato Institute Tax & Budget Bulletin entitled The Troubling Return of Keynesianism. You can subscribe to the Tax & Budget Bulletin here.

They point out that simplistic Keynesianism ended with its clearly failed policies of the 1970s when inflation took off and government efforts to create jobs clearly failed. History showed that stimulus actions were always too ill-timed or too ill-suited to have actually helped the economy. Politicians were also commonly driven by political motives which were not in the public interest. The failure of Keynesianism was demonstrated by the Nobel-prize winner Milton Friedman. Others replaced Keynesianism with "rational expectations" theory, which held that people make reasoned economic decisions based on their expectations of the future. Government cannot systematically fool them into taking actions which make them worse off.

John Cochrane of the University of Chicago noted that the idea of fiscal stimulus is "taught only for its fallacies" in university courses these days. Thomas Sargent of New York University says "the calculations that I have seen supporting the stimulus package are back-of-the-envelope ones that ignore what we have learned in the last 60 years of macroeconomic research." Robert Barro of Harvard University says the stimulus plan does not make sense. Just because the economy is in crisis, it does "not invalidate everything we have learned about macroeconomics since 1936." Other top macroeconomists such as John Taylor of Stanford University and Greg Mankiw of Harvard are also critical of the idea that the Obama stimulus plan will help the economy.

So, what have macroeconomists learned that can be helpful to the economy? Stop trying to cope with the business cycle with its short term time horizon and deal with long-term economic growth. They have learned to concentrate their efforts on tax reform, regulation, and trade issues.

Liberals Supervising and Directing Markets

Jay Ambrose wrote a fine column published in the Washington Times on 18 April 2008 on a New York Times Week in Review article claiming that liberals need to supervise and direct markets to keep chaos from running amok. They say that the Milton Friedman era has passed. Jay Ambrose points out that "even if we are less burdened and more prosperous than many of our industrial rivals, we are nowhere close to the low-spending, low-tax, government-shriveled, regulation-reduced, libertarian dream embraced by Friedman. In many respects, we have been marching in the opposite direction."

"Right now, says James Gattuso of the Heritage Foundation, 50 federal agencies are enforcing 145,000 pages of regulations at a cost to the economy roughly equal to all the income taxes paid last year, some $1.1 trillion. And contrary to what some might guess, writes this research fellow, regulatory costs have been climbing upward during the George W. Bush presidency -- by about $30 billion since 2001." This $30 billion increase is substantial, though nothing like the rate we would have under a President Obama or Clinton.

Ambrose goes on to discuss how the tale that President Franklin D. Roosevelt saved the country with his New Deal is entirely wrong. He quotes Thomas DiLorenzo's book How Capitalism Saved America as showing that despite FDR's creating many new federal programs and directly employing about 10 million Americans in relief jobs, the economy was as bad in 1938 as in 1933 and only the post-war recovery ended the depression.

A minor slowdown in the present economy should not be sufficient cause for us to abandon the self-correcting wisdom of the Capitalist system which repairs the wounds in the economy much more efficiently and with much less pain than do a gaggle of government bureaucrats. Those in favor of more government control and direction of the economy and of us as individuals are very adept at exaggerating problems to justify more government intervention. The fact that home values are now going up again in many areas of the country and that many companies just reported surprisingly high earnings for this last quarter shows that the harm to the economy of the housing credit and oil cost problems was probably exaggerated, in the best progressive tradition. Our motto should always be: "Trust the free market, stupid."