The Verdict on Keynsianism

The Wall Street Journal says the verdict is in on Keynesianism - epic fail - and it is seriously hard to disagree.  The 1.8 percent growth rate in Q1 GDP is just unacceptable.

The great advantage of Keynesianism (Ed: it rhymes with your name!) is also its great weakness.  It is exceedingly simple.  It's fair to think of monetary policy in simple terms: tighten money supply or loosen it?  While there are surely nuances of financial oversight and regulation, the point is that fiscal policy is simply never going to be so simple.  It wasn't simple in 1500, and it sure isn't simple now.  Fiscal policy under modern Keynesianism is, in public policy discussion, reduced to precisely that crude metric: more deficit-based government expenditures/taxes or less.  To say it misses the forest for the trees is also too simple.  What it misses is the genotype for the phenotype.  Or how about: it misses the recipe for the ingredients?  Help me before I metaphor again.

The beauty of growth economics is that it's all about the recipe, the great and glorious A, mystery of our economic ignorance.  The soul of the economy exists, and growth economists are figuring it out, bit by bit, year by year.  So this is my lament that the policy and media conversation is stuck in Macro, or worse, Middle School Macro.

The one dilemma I have is not whether modern Keynesianism is bankrupt (it is), but what that implies about the growth rate.  When I heard Scott Sumner speak in January, I really had to wonder if I, let alone he, believed there was a bubble in 2008 or not.  If it was a bubble, then we shouldn't expect GDP to "recover," nor can anyone blame politicians for the relatively weak recovery.  Right?  No, wrong, dead wrong.  If it was a real recession and not a bubble, then clearly the policy response has failed.  If instead it was a bubble, then the policy response has been an obscene waste of money.  There is no way out for Keynesians now. 

But if you're looking for the acid test on Keynesianism, ask the question posed by Dr. Garett Jones: "When did the stock market collapse?  Before or after TARP?"   You must know the answer by now.  (Ed: It was after!?  $&*!@#*) 

NOTE: Watch this video on the topic. Awesome.

 

Comments

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