Greg Mankiw writes my post for me

He quotes Blanchard and Perrotti, neither of whom is a follower of Milton Friedman:

find that both increases in taxes and increases in government spending
have a strong negative effect on private investment spending. This
effect is consistent with a neoclassical model with distortionary
taxes, but more difficult to reconcile with Keynesian theory: while
agnostic about the sign, Keynesian theory predicts opposite effects of
tax and spending increases on private investment. This does not appear
to be the case.

There is much more here and do read the whole thing.  The bottom line is that the evidence for the Keynesian effects of fiscal policy is far from overwhelming.  Keynesian results cannot be ruled out but we simply don’t understand the short-run dynamics of cycles very well.  So why should we be so convinced it is time to spend $1 trillion or more? 

Addendum: On this post comments seem to be working.  Sorry again for the troubles.


Comments for this post are closed