The Second Coming of Keynes

Senior Fellow
Kevin A. Hassett

As the world's economy has entered a dramatic slowdown, an interesting Keynesian revolution has taken shape. Up until recently, there was wide consensus among macroeconomists that activist fiscal policy was inadvisable. Princeton University's Alan Blinder, for example, wrote in 2004 that "virtually every contemporary discussion of stabilization policy by economists--whether it is abstract or concrete, theoretical or practical--is about monetary policy, not fiscal policy." Blinder went on presciently to question this consensus, but even he cautioned against relying too much on spending, stating that "if Congress decides to stimulate economic activity by building more public infrastructure, the natural spend-out rate of such programs will probably be very slow."

President Obama's economists have disputed that consensus. It was recently reported, for example, that Christina Romer, chairwoman of the Council of Economic Advisors, said "aggressive, well-designed fiscal stimulus is critical to reversing this severe decline." The New York Times helpfully added: "The vast majority of the nation's economists agree that one is necessary, and soon."

Statements such as these have been echoed by economists throughout the Obama administration, and by the new director of the Congressional Budget Office, Douglas Elmendorf, in recent congressional testimony. This apparent unanimity has had an enormous effect on the design of the current stimulus package, which calls for massive spending increases along with tax cuts.

The statements are not, strictly speaking, true. Monetary policy has pushed the economy as far as it can, but fiscal policy need not rely only on the Keynesian bag of temporary tricks.

The accompanying chart documents how dramatic this turn of events has been. It tracks the increase in government spending that occurred in each past recession (in blue) and the increase planned for the current recession. For scaling, all numbers are expressed relative to overall GDP. Until this year, the biggest countercyclical government-spending program in history was in the 1981-82 recession, when government spending increased by a bit more than 2 percent of GDP. In this recession, the increase will be approximately three times that.

The truth is that there is very little empirical support for policies such as these. They will likely provide a small boost, at an enormous cost. When the boost is gone, the cost will remain.

For those economists who are more skeptical of the theories of John Maynard Keynes, there is but one consolation: An experiment this large will provide ample opportunity for study.

Kevin A. Hassett is a senior fellow and the director of economic policy studies at AEI.

Also Visit
AEIdeas Blog The American Magazine
About the Author

 

Kevin A.
Hassett

What's new on AEI

AEI Election Watch 2014: What will happen and why it matters
image A nation divided by marriage
image Teaching reform
image Socialist party pushing $20 minimum wage defends $13-an-hour job listing
AEI on Facebook
Events Calendar
  • 27
    MON
  • 28
    TUE
  • 29
    WED
  • 30
    THU
  • 31
    FRI
Monday, October 27, 2014 | 10:00 a.m. – 11:30 a.m.
State income taxes and the Supreme Court: Maryland Comptroller v. Wynne

Please join AEI for a panel discussion exploring these and other questions about this crucial case.

Tuesday, October 28, 2014 | 9:30 a.m. – 12:15 p.m.
For richer, for poorer: How family structures economic success in America

Join Lerman, Wilcox, and a group of distinguished scholars and commentators for the release of Lerman and Wilcox’s report, which examines the relationships among and policy implications of marriage, family structure, and economic success in America.

Tuesday, October 28, 2014 | 5:30 p.m. – 7:00 p.m.
The 7 deadly virtues: 18 conservative writers on why the virtuous life is funny as hell

Please join AEI for a book forum moderated by Last and featuring five of these leading conservative voices. By the time the forum is over, attendees may be on their way to discovering an entirely different — and better — moral universe.

Thursday, October 30, 2014 | 2:00 p.m. – 3:00 p.m.
A nuclear deal with Iran? Weighing the possibilities

Join us, as experts discuss their predictions for whether the United States will strike a nuclear deal with Iran ahead of the November 24 deadline, and the repercussions of the possible outcomes.

Thursday, October 30, 2014 | 5:00 p.m. – 6:15 p.m.
The forgotten depression — 1921: The crash that cured itself

Please join Author James Grant and AEI senior economists for a discussion about Grant's book, "The Forgotten Depression: 1921: The Crash That Cured Itself" (Simon & Schuster, 2014).

No events scheduled this day.
No events scheduled this day.
No events scheduled this day.
No events scheduled today.
No events scheduled this day.