Has Keynesianism Ever Worked Anywhere?
“Forty years ago,” our own John Taylor noted here earlier this week, “in a famous debate with Keynesian economist Walter Heller, [Milton] Friedman said
‘The fascinating thing to me is that the widespread faith in the potency of fiscal policy…rests on no evidence whatsoever. It’s based on pure assumption. It’s based on a priori reasoning.’”
That got me to thinking. In the four decades since, have there been any instances in which a Keynesian fiscal stimulus has actually worked? In Canada or Sweden? In Belgium or France? For that matter, in Andorra, San Marino, Liechtenstein or Monte Carlo?
To put it another way, when Paul Krugman tells us the problem with Obama’s $800 billion stimulus is that it was too small, is there anything other than Krugman’s own theories on which he’s basing that claim? Not scratchings on Krugman's chalkboard, but actual, demonstrable human experience? At any time? In any place?
That strikes me as a darned good question. I herewith toss it into the Ricochet mosh pit.
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Jul '10
Re: Has Keynesianism Ever Worked Anywhere?
Keynesians have a great little hustle.
The business cycle is the business cycle. It waxes and wanes.
If the Keynesians can convince politicians to throw money out of helicopters at the first sign of a slow-down, they can then claim credit when the business cycle comes around to growth again.
It's shaymanism: if I know when a solar eclipse will happen, I can slaughter a chicken and...behold!....I have made the sun go dark.
That sort of mojo can get you some serious foundation money, an academic sinecure and air time on MSNBC.
Maybe even a Nobel Prize.
Edited on Sep 5, 2010 at 8:47pmRe: Has Keynesianism Ever Worked Anywhere?
I can't think of a single example. I don't know for certain, but I'm willing to bet that Paul Krugman and other Keynesians also believe in the multiverse. And Santa Claus, for that matter.
Jun '10
Re: Has Keynesianism Ever Worked Anywhere?
The only case where I see Keynesian pump-priming working, is where there's persistent recession and high unemployment in the midst of plentiful (and unregulated) domestic or international natural resources. A case where the raw materials are hard to extract, or are across the sea, and business can't afford the start-up or transportation costs. And in a case like that, why wouldn't the private investor jump in to take advantage of the opportunity? They would. In in modern America, the private sector is not hesitating for lack of capital. They're sitting on their capital. So Keynesianism seems completely beside the point. That's not our problem.
Re: Has Keynesianism Ever Worked Anywhere?
My undergraduate focus was in economics and I distinctly remember one of my professors -- a good friend -- beginning his intermediate macro class by telling us that what he was about to teach us was demonstrably false -- but that economists hadn't come up with anything better. And then we learned a lot about Keynesian approaches.
I'd already read enough to know that many economists had better theories, but I didn't learn them at university.
Dismal, maybe. Science? Not so much.
May '10
Re: Has Keynesianism Ever Worked Anywhere?
Peter,
It depends on what the objective is. I have lived through enough Keynesian failures (most notably Japan in the 90s) to have no faith in its efficacy. I have never known it to truly improve the economy in a sustainable fashion.
I have seen it work effectively however at getting politicians re-elected. I suspect that this, rather than true economic improvement is more often the motivation behind its application.
Jun '10
Re: Has Keynesianism Ever Worked Anywhere?
Kenneth: It's shaymanism: if I know when a solar eclipse will happen, I can slaughter a chicken and...behold!....I have made the sun go dark.
That sort of mojo can get you some serious foundation money, an academic sinecure and air time on MSNBC.
Maybe even a Nobel Prize. · Sep 5 at 8:40pm
Edited on Sep 05 at 08:47 pm
Does PETA know about what you do with chickens, Kenneth? Used to be a guy could slaughter a chicken without conseequence, now you can't even eat as KFC without guilt.
Jun '10
Re: Has Keynesianism Ever Worked Anywhere?
I didn't study economics like Mollie, and I admire Mr. Taylor. Basically my economics are check-book simplistic. But one can get a sense after living so many years on this planet and my sense of macro economists is similar to how I feel about skin doctors. Neither one gives me any confidence that they know what the solution is. They are all highly educated, but they are dealing with symptoms that arise out of very complex sets of relationships. So when they tell you to put this salve on and come back in a couple of months, you pretty much know that their guess is as good as yours.
May '10
Re: Has Keynesianism Ever Worked Anywhere?
What about the interstate highway system under Eisenhower? Forget the silly argument that stimulus helps "usher us out of recession." But can't a decent argument be made that deficit spending in a deep recession, if properly spent, can help ease the pain of the "winter" while at the same time leaving the country with something tangible and useful in the "spring"? What if, for example, we came out of 2011 with dozens of nuclear power plants and oil refineries and a re-armed military? Such a bill would not have "caused" the recession to end, of course, but it wouldn't have been an outrageous use of the nation's credit card either, right?
Ah, but it's a moot point, because in the real world we would never get such a sensibly written bill. And it's in the real world that we must live......so forget Keynes.
Jun '10
Re: Has Keynesianism Ever Worked Anywhere?
Isn't the logic of Keynsian economics tied up with our national effort in World War II in the sense that North America is in depression and the war comes along to force government spending into the stratosphere, which then "ends" the depression. In addition the Marshal Plan may have had an influence in establishing Keynsian credibility in that by furnishing Europe with a life line it also stimulated an American economy that needed to employ returning GIs? I am aware that multipliers are no longer what they were once thought to be and that Keynsian logic now seens more like voodoo economics, but I suggest the above examples as possible reasons for the primacy of Keynsian economics for much of the twentieth century.
Jun '10
Re: Has Keynesianism Ever Worked Anywhere?
At first, back when discussing a possible stimulus, I thought exactly like you Scott. One/third of the stimulus to tax relief, perhaps a payroll tax holiday for both employees and employers for a year, one third for States to support unemployment and medicaid/medicare, and one third for capital improvement such as power plants or an overhaul and modernization of the country's energy grid. The problem, as Obama and his minions have since found out, is that huge capital projects don't get thought of tonight and construction begins tomorrow. You can't even build a garage on your own property that fast. In other words, they are not shovel ready. Nothing of true substance and quality is shovel ready. They could, however, have searched for and examined projects that had been on the books for years already, languishing in the bureaucratic morass and opened the doors with green lights. But a lot of this stuff is grasping at the wind looking for quick fixes. I believe long term stability is the best solution. Reduce capgains to 10% for 10 years along with long term corp tax reduction. Tell the world, come here, we are open for business.
Jul '10
Re: Has Keynesianism Ever Worked Anywhere?
Well, well, well...they just refuse to learn:
I see this morning our profligate boy-President is proposing a $50 billion program of "investments" in "roads, railways and runways". (The alliteration will come in handy on the stump).
Front-loaded (er, shovel-ready?) of course, for maximum stimulus impact.
This will be "fully paid for", naturally. By "...eliminating certain tax breaks for oil and gas companies..."
Paving the way, some months or years down the road, for wildly-popular televised Congressional hearings in which oil-company panjundrums will be excoriated for increases in consumer prices of oil, natural gas and gasoline.
This, of course, comes on top of the $32 billion "small business stimulus bill", which will be paid for by raising taxes on the $250,000-plus crowd. Who are, of course, predominantly small-business owners.
Re: Has Keynesianism Ever Worked Anywhere?
Kenneth: Keynesians have a great little hustle. The business cycle is the business cycle. It waxes and wanes.
If the Keynesians can convince politicians to throw money out of helicopters at the first sign of a slow-down, they can then claim credit when the business cycle comes around to growth again. Sep 5 at 8:40pm
Kenneth makes a great point. The reason Obamanomics is such an epic fail is that it isn't even Keynesian. Keynesians believe in demand-side spending coupled with tax and regulatory easing to treat a recession. Obama is giving us massive spending, sure, but simultaneous regulatory tightening and massive tax increases, plus a healthy dollop of uncertainty. There is no coherent economic theory -- not one -- that supports this policy mix. Unless, of course, you credit the tear-down-the-system school of anti-Obama thought.
May '10
Re: Has Keynesianism Ever Worked Anywhere?
I'm nowhere near an authority here, but this example doesn't seem like a Keynesian project to me. I think there's a big difference between government spending for the sake of spending (Keynesianism) and federal projects to build interstate infrastructure that facilitate interstate and international commerce (not to mention military transport). The latter instance are unquestionably proper federal initiatives.
Aug '10
Re: Has Keynesianism Ever Worked Anywhere?
I expect like Cinderella's slipper on the stepdaughters' feet, there's a lot of pressure to make Keynesianism fit somehow.
Remember that if you accept high enough error and enough fudge factors, you can get the data to fit any theory. The quote George liked so much yesterday is, "With four parameters I can fit an elephant, and with five I can make him wiggle his trunk."
Well, with a sixth parameter, I imagine even the elephant could do Keynesian economics without trouble.
That don't make it right, though.
Jul '10
Re: Has Keynesianism Ever Worked Anywhere?
Matthew Gilley
I'm nowhere near an authority here, but this example doesn't seem like a Keynesian project to me. I think there's a big difference between government spending for the sake of spending (Keynesianism) and federal projects to build interstate infrastructure that facilitate interstate and international commerce (not to mention military transport). The latter instance are unquestionably proper federal initiatives. · Sep 6 at 7:56am
I agree with Matthew. Infrastructure spending isn't Keynesian. Keynes' theories were about smoothing the business cycle - i.e., "managing" the natural fluctuations of the free market.
King Canute could have told anyone who cared to listen how well that would work.
Edited on Sep 6, 2010 at 8:17amAug '10
Re: Has Keynesianism Ever Worked Anywhere?
Steve MacDonald: Peter,
It depends on what the objective is.
Quite so. Or as I'd phrase it, works in what way? Whether or not any policy yields bushels of dollars is often beside the point. People do things for things other than money. A good (though not necessarily Keynesian) example is the breakup of Yugoslavia. All it got for Serbia was the loss of customs duties from the satellite republics. Croatia could have better spent the time promoting its lovely coastline, but instead it fought like crazy so that on its most recent Independence Day, one of its statesmen could say the phrase "Euro-Atlantic integration" in a speech in a graveyard. And yet nobody is laughing, or saying the old Yugoslavia should be brought back. To the extent these places are animated at all by economic considerations, it's to get into the EU and live off German taxpayers, as Slovenes do. Economic policy is usually secondary to political policy, and the soundness of the former is irrelevant (or mistakenly praised) if the latter satisfies in any abstract way.
Jul '10
Re: Has Keynesianism Ever Worked Anywhere?
I agree. In Japan, for example, the 1990s were spent (literally) implementing stimulus bill after stimulus bill, none of which helped the country see positive GDP growth. However, Ed Lincoln makes the argument that rather than creating growth, all the stimulus and bank bailouts did was keep Japan's head above water, otherwise the crisis, brought on by a collapse in asset prices, would have been much, much worse.
Deep recessions do seem to me like good times to spend money on things you need for the future, although it's the ability of government to adequately implement that spending that I am skeptical of. The Obama stimulus and its abject failure are evidence of government's ineptitude at channeling money efficiently into the economy.
May '10
Re: Has Keynesianism Ever Worked Anywhere?
The Marshall Plan is the only case that I can think of that could reasonably be argued as a Keynesian success. That being said, completely rebuilding a continent (plus Japan) isn't exactly equivalent to your average US recession.
I think the the major problem with applied Keynesianism is that it tries to create artificial demand as a means of getting production moving again. In the highly complex, and largely unintelligible, organism that is the US economy, this demand remains an outsider while functioning and then dissipates when the program ends. For demand side economics to function, there has to be a natural, and preferably long-term, demand for the goods and services being stimulated, born of necessity or desire.
That's why simply throwing money at random construction projects doesn't work, but spending on WWII or the Marshall plan did. There was a real long-term necessity for war production and the rebuilding of Europe, and the effects reached much deeper into the economic organism.
Edited on Sep 6, 2010 at 8:43amAug '10
Re: Has Keynesianism Ever Worked Anywhere?
John H.
Or as I'd phrase it, works in what way?... Economic policy is usually secondary to political policy, and the soundness of the former is irrelevant (or mistakenly praised) if the latter satisfies in any abstract way.
Well put.
To play devil's advocate here, though, non-free-marketers could -- and do -- make the same complaint of free-marketers. They say of us that free markets don't really work economically, but instead serve our wicked political agenda. Now I don't believe them, because I don't see non-free-market theory fitting the facts as well as free-market theory does, but naturally, being a purblind believer in free markets, this would be what I'd see.
I sure hope that "what works" doesn't always have to boil down to "what works politically" -- but the more intimately government becomes involved in all aspects of life, the more "what works" in any sphere diminishes to "what works politically".
Jul '10
Re: Has Keynesianism Ever Worked Anywhere?
The confusion here about infrastructure spending versus Keynesian stimulus needs to be simplified.
If farmers in Kansas cannot get their wheat to market in Cincinnati without excess costs of transport and spoilage, due to lack of efficient transportation infrastructure, then building good highways will have a long-term positive effect on economic growth.
However, building those highways is not "stimulative" in the Keynesian sense, because the jobs "created" by the highway project will not materialize within a single business cycle.
Moreover, the money needed to fund those projects must be taxed or borrowed away from the private sector, which reduces private-sector economic activity in the short term.
Infrastructure is a good thing, up to a point. But it's not Keynesian.
Up to a point? Fact is, we have adequate infrastructure already. So the "Keynesian" infrastructure spending we now indulge in comes in the form of beautifying highway medians or building bicycle paths for metrosexual Presidents in mom jeans.