Friday, August 26, 2011

Keynesianism and the stimulus

A Keynesian economics is of course central to the stimulus spending which we saw in '08 and will perhaps see again as the economy continues to go nowhere.  There is some question as to whether this approach actually worked in the 30's, a recent study by some academics at UCLA argued that the New Deal programs actually prolonged the depression rather than brought us out of it as is popularly taught in schools.

But beyond that question is the assumed universality of the Keynesian solution. It is like those in case of a fire break glass ideas, i.e. in case of a recession, increase government spending.  Thus, Moynihan in 1981 is asking a question via an observation that is especially pertinent to today:

"Keynesian economics was a huge idea that swept through the universities of Britain and this country in the 1930s by purporting to explain how the Great Depression came about, how to get out of it, and most important of all how to avoid another [it also promised a greater role for economists which probably didn't impede its sweep through the universities - me]....It was brilliant but it was flawed.  Central to Keynesian thought was the idea that modern industrial economies oversave and that as a result, large resources of capital and labor end up unused.  The Keynesian answer was to overspend.  For the government that is to overspend.  Enter the deficit as public policy.

In a curious way, this message was reinforced by the maturing of the industrial economy.  By this I mean nothing more complicated than that railroads, steel mills, and the assembly lines finally all got built.  Until then saving--the forgoing of consumption--was absolutely necessary in order to make those investments.  Now, those investments having been made, they could only return a profit if people commenced to consume their products.  The advertising business began in earnest.  Someone invented the installment plan.  The Federal  government began to guarantee home mortgages.  The logic our economy, as of our reigning economics, also decreed: overspend.       

9/25/81 (page 438) DPM A Portrait in Letters of an American Visionary

It isn't necessary here to agree with Moynihan's causation.  The point is that Keynesianism is premised on over-saving but the economy has transitioned to a different state.  We now over-spend not just at the level of government but privately.  So why are we still looking to Keynes for the solution?

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