What Evidence Do We Have That the Keynesian Stimulus Contraption Actually Works?

 

Zero evidence–literally zero.

And that’s not just my view.  That’s the conclusion of Harvard economist Robert Barro.  Here’s Barro in today’s Wall Street Journal:

Keynesian economics–the go-to theory for those who like government at the controls of the economy–is in the forefront fo the ongoing debate on fiscal-stimulus packages.  For example, in true Keynesian spirit, Agriculture Secretary Tom Vilsack said recently that food stamps were an “economic stimulus” and that “every dollar of benefits generates $1.84 in the economy in terms of economic activity….”

How can [this] be right?  Where was the market failure that allowed the government to improve things just by borrowing money and giving it to people?  Keynes, in his “General Theory” (1936), was not so good at explaining why this worked, and subsequent generations of Keynesian economists (including my own youthful efforts) have not been more successful.

Theorizing aside, Keynesian policy conclusions, such as the wisdom of additional stimulus geared to money transfers, should come down to empirical evidence.  And there is zero evidence that deficit-financed transfers raise GDP and employment—not to mention evidence for a multiplier of two.

On what basis, then, has the Obama administration increased our indebtedness by more than $1 trillion, raising federal outlays to the highest share of GDP since the Second World War? On the basis of a theory–just a theory.

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  1. Profile Photo Thatcher
    @CUDouglas

    At present, the Keynesian argument in favor has been, “Well it would have been much worse if we had not done so.”

    Unfortunately, and I rarely see this countered in the venues I frequent, that’s a hypothetical argument. How many more jobs we would have lost, how much more the economy would have dipped, is never quantified and cannot be quantified. We are just required to accept, on faith, that Keynesian methods worked — that we’re better off than we would have been otherwise.

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    @CaptAubrey

    They come up with these multipliers that are all inaccurate and have been proved wrong. In fact the inability of government to stimulate aggregate demand is clear to anyone who looks at the facts that I believe there is another theory going on that more accurately describes their policies. That is Public Choice theory that says politicians act rationally when you realize their goal is always re-election but they have trot out the Keyensian nonsense because it wouldn’t be polite to say, “we paid off the people who got us elected”

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    @DeletedAccount

    There’s a much simpler problem with Keynes I’ve never been able to understand (and maybe someone could explain it to me). If the government spending $1 generates $1.84 of economic activity, then wouldn’t the government taking that $1 from someone generate a $1.84 loss of activity? (And probably more, since it costs money to take money, whether it’s via taxation, borrowing, or inflation.) Or maybe I’m just too old school to understand….

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    @JosephEagar

    Transfer payments have low multipliers–I’ve read that on lefty blogs as much as conservative ones. The idea that food stamps have any multipliers at all is absurd, since people use them to buy food. We don’t have a demand problem for our agricultural products; farmers can and do export their products as easily as they sell them domestically.

    I highly doubt Keynes himself would approve more deficit spending (not in the U.S., anyway, or Europe). The dirty truth is that deficit spending only works if you have a trade surplus you can sacrifice to pay for it.

    Our economy is too dependent on debt (both private and public) to achieve full employment. Our foreign creditors are increasingly less willing to finance the sort of debt-binge we’ve used in the past to get our economy growing. Thus, we only have one avenue available to us: exports (and especially service exports).

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    @DavidCarroll

    The Keynesian theory was that you need to look at the dynamics of money supply. On a static point-in-time basis, it makes no sense to take money from one pocket and deposit in another. The total supply is the same. The Keynesian theory was when the government spends money the money gets used more times (multiplier effect) than if the money were in private pockets. So government spending should generate more money on a dynamic basis because it will turnover faster or more frequently. In practice, this particular dynamic model theory just doesn’t work. The money goes from the government right into private hands. Why would the money turn over faster than other money in private hands? It woudn’t and doesn’t.

    This theory would be counterintuitive in most government budgeting and projections, because government bean-counters don’t do dynamic models very well. But this Keynesian dynamic theory appeals to the big spenders, so the Keynesian dynamic model — that does not work –is all the rage in their circles, while they ignore the dynamic models on tax cuts (or worse, tax increases) that do work.

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    @DonTillman

    Have you heard the phrase “It’s not about that”?

    Well… what if it’s not about that?

    What if Keynesian Economics is not really about what it says it’s about? What if it has nothing to do with economics? What if the economics part was just a facade?

    Is there a way to objectively assess such a possibility?

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    @dittoheadadt
    Don Tillman: Have you heard the phrase “It’s not about that”?

    Well… what if it’s not about that?

    What if Keynesian Economics is not really about what it says it’s about? What if it has nothing to do with economics? What if the economics part was just a facade?

    Is there a way to objectively assess such a possibility? · Aug 24 at 11:11am

    Y’mean, like, maybe the “basis” is the desire for a, oh, I don’t know…a fundamental transformation of America? That Keynesian economics is being used as a red herring, to distract the willfully blind from what the real endgame is?

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    @liberaljim

    Bush 1&2, and Clinton followed basically a Keynesian approach. As Rubio noted in his most recent speech Obama is doing the same things that have been done for sever decades, he is just doing more of it. The real question is why every administration and every congress adopt this theory in practice if not I rhetoric. I believe political corruption is the answer. If the country has been run by a political class that consistently put the welfare of party, self and donors ahead of country, understanding why we are in the situations we are in is easy. If however the country has been run by well educated, patriotic, public servants, how do we explain the current situation?

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    @user_83937

    Joseph Eagar makes a point similar to mine, that Keynes’ didn’t base his theory on a hypothetical, wherein the government was already deeply in debt. Whether or not you believe his theories had any basis is not relevant when what is currently being done is not Keynesian.

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    @wilberforge

    Part of the assumption that Keyesian economics worked in 1936 has a serious flaw, it is now 2011. Not only have the circumstances changed, the built in structural assumptions to make the theory work, no longer exist. This is a basic truth that cannot be dismissed in the arguement.

    It can be simply explained, save the Force Muliplier aspect has become a religion to the supporters of the theory. All so much Blue Sky to be sold there.

    If it were true, the spare change provided the warm environment of my trouser pocket should have increased in number by now. Oh, thats wrong in this theory. If I give it to you, it will magically multiply in the warm moist envionment of your trouser pockets.

    Something in that description goes no further..

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    @DavidWilliamson
    Peter Robinson

    On what basis, then, has the Obama administration increased our indebtedness by more than $1 trillion, raising federal outlays to the highest share of GDP since the Second World War? On the basis of a theory–just a theory. ·

    Err, Socialism, or, more accurately, Marxism?

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    @JosephEagar
    David Williamson

    Peter Robinson

    On what basis, then, has the Obama administration increased our indebtedness by more than $1 trillion, raising federal outlays to the highest share of GDP since the Second World War? On the basis of a theory–just a theory. ·

    Err, Socialism, or, more accurately, Marxism? · Aug 24 at 2:35pm

    Edited on Aug 24 at 02:35 pm

    Obama is a Swedish-style corporatist social democrat (the idea that labor, big business, and government are “social partners” that run the society). That is a form of socialism, but it’s a little extreme to label it Marxism, and saying so discredits all comment on Obama’s ideology.

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    @Percival

    Keynes was right about one thing: in the long run, he died.

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    @JosephEagar
    Percival: Keynes was right about one thing: in the long run, he died. · Aug 24 at 3:25pm

    That is awesome.

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    @Sisyphus
    Joseph Eagar

    Obama is a Swedish-style corporatist social democrat (the idea that labor, big business, and government are “social partners” that run the society). That is a form of socialism, but it’s a little extreme to label it Marxism, and saying so discredits all comment on Obama’s ideology.

    Nope. Stanley Kurtz did the leg work the media did not, for Radical-In-Chief, and spoke on the book with Peter Robinson here. He wanted a nice, mainstream book and the facts dragged him to the socialist verdict. And the bullying of businesses as industrial policy is as contemptible as it is ineffective in the long run, whether it is shutting down car dealerships based on political donation filings or using ObamaCare to generate benefits at the expense of the medical insurers (message, quit now so Obama can crank up single payer).

    All discussions on Obama’s ideology either begin and end with Marxism and Alinsky or mislead.

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    @MarkWilson
    Peter Robinson Zero evidence–literally zero. … On what basis, then, has the Obama administration has increased our indebtedness by more than $1 trillion, raising federal outlays to the highest share of GDP since the Second World War? On the basis of a theory–just a theory.

    Small terminology nitpick: I would call this more of a conjecture than a theory. After all, we landed men on the moon on the basis of the theory of gravitation.

    A theory is an explanatory idea supported by evidence with no counterexamples. A conjecture is an assertion without evidence.

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    @Aodhan

    Consider economic Keynesianism and libertarian conservativism as rival intellectual memes.

    Each competes to survive and thrive in the sociopolitical environment.

    That environment is currently dominated by the state. The state exerts selective pressure on both memes, via differential patronage, encouraging the meme which better perpetuates it.

    Which emerges as the fittest meme in this environment? To ask the question is to answer it.

    Ergo: Krugman.

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    @JosephEagar

    I saw that interview, and I thought it pretty much confirmed what I said? Socialism, but not to the point of Marxism? There are plenty of criticisms for Obama related to social democracy (starting with its tendency to steal wealth from future generations and condemn young people to something akin to second-class citizens). But we can’t get on with the criticizing if we insist on labeling him a Marxist.

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    @PeterMeza

    In fact, there is evidence that disputes their theory: http://hallingblog.com/what-do-keynesians-and-the-flat-earth-society-have-in-common/

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    @Sisyphus
    Joseph Eagar: I saw that interview, and I thought it pretty much confirmed what I said? Socialism, but not to the point of Marxism? There are plenty of criticisms for Obama related to social democracy (starting with its tendency to steal wealth from future generations and condemn young people to something akin to second-class citizens). But we can’t get on with the criticizing if we insist on labeling him a Marxist.

    Do you mean Marxism or Communism? Socialism and Communism are both elements of Marx’s Theories. Social Democracy is just a redressing of Germany’s National Socialism without the work camps and the genocide, which itself was intended as an intermediary step into full scale Communism suitable for post-Weimer Germany.

    The fact that the modern social democrats in Europe show some sign of pragmatism and an eagerness in some circles to avoid the fatal excesses of 20th Century Socialism does not mean that Obama respects those concerns. In the book Kurtz documents the hard core Marxist childhood influences, Marxist connections in college, Marxist conferences attended, complete with L’Internationale as the anthem.

    19th Century anarchist utopiots spawning 20th Century statist distopias. Talk about your tragic view.

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