The Failure of Keynesian Politics

Let's accept for the sake of argument the truth of Keynesian economics. It is now clear that Keynesian politics has failed. But don't take my word for it. Here's Paul Krugman on the great abdication:

…without saying so explicitly, the Obama administration has accepted the Republican claim that stimulus failed, and should never be tried again.

What’s extraordinary about all this is that stimulus can’t have failed, because it never happened. Once you take state and local cutbacks into account, there was no surge of government spending.

If that sounds familiar let's remember that by their own admission Keynesians believe that Keynesian politics also failed during the Great Depression. Again, Paul Krugman on the New Deal:

…you might say that the incomplete recovery shows that “pump-priming”, Keynesian fiscal policy doesn’t work. Except that the New Deal didn’t pursue Keynesian policies. (emphasis in original).

So we have had two major cases that massively favored Keynesian economics but Keynesian politics failed both times. Not that this should be surprising, Keynes himself told us that his theory was more suitable to totalitarian regimes:

The theory of aggregated production, which is the point of the following book, nevertheless can be much easier adapted to the conditions of a totalitarian state [eines totalen Staates] than the theory of production and distribution of a given production put forth under conditions of free competition and a large degree of laissez-faire.

More recently, other people (including Paul Krugman as I recall although I can't find a good link) have said similar things about the chaos of democracy versus the Chinese government's ability to stimulate at will.

Now I will take a large degree of laissez-faire and the chaos of democracy over authoritarian political and economic regimes any day. I assume most Keynesians would as well. Thus, if we can't count on massive increases in government spending during a recession to mop up problems ex-post shouldn't we all, Keynesians and otherwise, be spending more time thinking about ex-ante alternatives to Keynesian politics?

What are the alternatives to Keynesian politics?  Greater regulation to prevent crises from occurring is a legitimate response, although one that I wouldn't necessarily buy into in all particulars. Along the same lines, increasing wage, price and real flexibilities (e.g. relocation flexibility and public and private savings flexibility) would benefit us in future recessions. Automatic stabilizers such as unemployment insurance are one area that has worked quite well. What other areas can be automatized? Funding for states? How about an automatic payroll tax cut tied to the unemployment rate? (fyi, Keynes favored the latter).  

More generally, we can probably get more agreement today on policies that will operate tomorrow than we can get agreement today on today's policies or agreement tomorrow on tomorrow's policies.

Addendum: Ezra Klein comments and here is Megan McArdle and here is Paul Krugman.


Comments for this post are closed