1/31/2009

Have Keynesian Economists Been Delt the Perfect Hand?

With the latest news that GDP fell at the annualized rate of 3.8% in the fourth quarter of 2008, Obama and his administration are preaching the urgent need to pass the stimulus package currently before the U.S. Senate. There is however, a great deal of debate as to whether or not this package is heading in the right direction. It is large enough? Should it focus more on spending and less on tax cuts or vice versa? From this article it is plain to see that there are many opinions and some are very contradicting. Economist Debate But contradicting opinions can be helpful in the learning process. The way I see it is if and when this stimulus plan is put into place it may possibly be the perfect situation to truly test Keynesian Fiscal Policy. The question is: Are we willing to take a trillion dollar gamble? If not we could always turn to China and Russia. Vladimir Putin and his Chinese counterpart are publicly critiquing the U.S. macroeconomic policies. Maybe we should ask them for advice.

7 comments:

Dr. Tufte said...

Ooh. Lots of good stuff here ...

1) If this is our criteria for the perfect test of Keynesianism, then we are pulling a "see no evil" "here no evil". The previous "perfect test of Keynsianism" was Japan in the 90s. The evidence isn't supportive, so this has quickly become a fact that is easier to ignore.

2) Contradicting opinions are only useful if you know how much effort when it to finding them. If they were easy to find, then they are important. But, if the reporter had to dig to find support for one position, it's probably nonsense. Reporters never divulge this sort of information, in a Quixotic quest to be balanced.

3) Advice from Russia and China is laughable - although they seem more than willing to give it. Russia survives by using oil revenues to paper over problems. China does the same with trade revenue. Both are more similar to where the U.S. - with profitable industries supporting less profitable ones - may be heading that to where it now.

Gracie said...

Could it possibly be a good idea to take advice from other countries besides Russia or China? Maybe if we emulated France, our economy could be doing better. If all recessions are different, then maybe if we look at other economies that are doing well in this same recession, we could get a better idea on how to implement a successful stimulus.

Dr. Tufte said...

I agree.

The interesting thing about France is that from 1982 to 2005 they moved left while we moved (generally) right.

Now, as we move left, they're moving back to the right - and doing fairly well relative to other countries in this recession.

Abigail said...

France is doing well. But we need to look at the reasons for this before we try to emulate them. France has a huge public sector. According to a recent article in the Wall Street Journal in 2007 public spending was equivalent to 52.4% of GDP, compare this to the U.S. where public spending was equivalent to 37.4%. Because the government is slow to cut back, a larger public sectors should translate into a country's wages and spending being less vulnerable. A large public sector may good during a recession, but most economist agree it hinders growth in the long run.

Dr. Tufte said...

You're right.

But my point was that the French are going in the opposite direction of everyone else.

harold said...

Perfect tests are flights of fantasy and textbooks. But it is a good test of the Abba Lerner Keynes and R.F.Kahn doctrine that public investment has a multiplied impact upon GDP and therefore employment contrary to the Treasury view that it simply displaces private investment. Bearing in mind that the stimulus bill may be not large enough, shocked and distressed animal spirits too large for a one time only stimulus to reverse and that necessary support from other countries is definitely too small we should still see some positive impact . This will be manifested in a recession of shorter duration and less depth and a return to positive growth more swiftly than would otherwise be the case provided the Fed does its job of keeping interest rates as close to 0 as possible. Both monetary and fiscal policy are necessary. Keynes never thought otherwise.

Dr. Tufte said...

The problem is figuring out how important the stimulus package was after the fact.

I don't think there's any doubt that Keynesians have been dealt a situation in which they ought to be able to clearly demonstrate that their policy prescription works. If not now, when?

Having said that, the contraction will end at some point, so the stimulus package is going to be correlated with an upturn no matter what. But correlation isn't causation.