Russ Roberts Making Sense on the Trouble with Economic Stimulus Policy Packages

Stimulus packages are politically popular, but do they make economic sense?  Russ Roberts explains the problems with public policy measures intended to provide short-term economic stimulus.

A less measured way to put this would be, why Keynesianism was wrong in 1936, 1956, 1976, and will be wrong in the year 2056.  In other words, Keynesianism is just wrong analytically and practically as argued by both Hayek (analytically) and Friedman (practically).  But it does have a powerful lure politically that has persisted despite its intellectual defeat by first Hayek, then Friedman, and finally by Lucas.  Perhaps nobody has explained why it has such political sway as well as James M. Buchanan, starting with Public Principles of Public Debt and continuing in Democracy in Deficit: The Political Legacy of Lord Keynes (with Richard Wagner).

Hopefully, the listeners of NPR will hear Russ Roberts's reasoned argument and pay attention to what he is trying to say to them about the less than stellar track-record of policies that attempt to provide economic stimulus, as compared to the success of policies that promote long run economic growth by structuring and aligning incentives so that we are more productive and more innovative.

Comments

[Grant]

One thing I've never understood about Keynesianism...

Why do they concentrate on "fixing" the corrective phase, the recession? I don't think (and least I hope) its not a uniquely Austrian insight that recessions are the result of clusters of business errors which take time and effort to be corrected. Its relatively obvious that is the case, especially in the housing crises. There are areas in south Florida where the housing market supposedly has a surplus of 2-3 years! All those people involved in construction, electrics, plumbing, roofing, air conditioning, and every other aspect of real estate have a chance of loosing their jobs. I can't fathom how monetary injections or more government spending could possible help this situation.

Am I correct that their line of reasoning has its roots in a complete disconnect between macro and microeconomics?

[DeeWilliams]

Pete,

How exactly do you define Keynesianism? You criticize it frequently, but this posts made me realize I have no idea what you mean by the term.

I think most people these days define a "Keynesian" as someone who explains the business cycle as being the product of fluctuations in aggregate demand. It seems the only natural way to define "Keynesian" since it is the main thread running through the work of "New Keynesians" like Greg Mankiw , "Neo-Keynesians" like James Tobin, and also Keynes himself.

Of course, this definition would mean that Friedman was also a "Keynesian". Since you don't consider him to be one, I can only guess your definition is probably a reflection of the empirical debates of 40+ years ago between the "Monetarists" and the "Keynesians".

But isn’t that dated and a little confusing for anyone that was educated in the past 10-15 years? After all, the real story of the past 30 years hasn’t been about the slope of the LM curve, it’s been about the theoretical possibility of whether fluctuations in aggregate demand have any impact on output AT ALL (interesting note, you mention Lucas’ criticisms as applying to "Keynesianism", but one would think they would apply just as well to the "Monetarists" and even the "Austrians").

So why the old-school definition? Is it all politics?

[Peter Boettke]

Dee,

You will probably disagree with me, but I don't think the definition is dated at all. And I would say that Friedman was a "Keynesian" in the same sense that you state, but he argued that the Keynesian policy prescription was impractical. Note my distinction between the analytical and practical critique.

I think Keynesianism --- fundamentally the belief that there are macroeconomic variables that interact with one another --- has negatively influenced economics theoretically and empirically for over 50 years. I wrote an earlier entry on this blog entitled "The Data of Development" which attempted to explain my position on this. Keynesian theory led to a quest for Keynesian data to pursue Keynesian policy. We may have poked holes in Keynesian theory, but we are still working with Keynesian data and using it to pursue Keynesian policies (e.g., Bush's stimulus package).

The full implications of the rejection of Keynesianism in economics and economic policy is quite radical.

Pete

[Peter Boettke]

BTW, it is not politics at all. It is about economic analysis.

There are "political economy" issues, but even those are analytical.

Disagreement in economics is not necessarily ideological, it can instead be analytical, empirical, and philosophical. In fact, I would argue that most debates in economcs are misidentified as ideological, when in reality it is something else that is going on.

Pete

[Peter Boettke]

Here is the previous post on The Data of Development.

http://austrianeconomists.typepad.com/weblog/2005/08/the_data_of_dev.html

Pete

[DeeWilliams]

Pete,

Thanks for the clarification and the link to the excellent post. I agree that even though modern macro does a better job of laying out its "micro-foundations", most policy analysis still takes place using the same aggregate data that was used 40 years ago. That may be a problem and abandoning them would be a radical shift in applied macro.

I also want to clarify, that when I asked "is it all politics" I didn't mean to imply that YOU were being political in your word choice. I was asking whether your definition boiled down to the different political (policy) implications of various theory. Sorry for the unclear langugage.