There’s a lot of discussion in the blogsphere regarding how Keynesian stimulus is proving to be politically impossible. They assertion is Keynesianism would work great, if only we had enough political courage to do it right. (“right” meaning spend WAY more than a measly 2.8 trillion.)
Krugman says (and Christina Romer agrees) that we just didn’t spend enough during the depression to fix the problem, and many feel the latest Obama stimulus program suffered from the same problem. The bottom line is punctuated by Alex Tabarrok who says:
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…
What I have not seen posted yet is anything about the Reagan tax cuts and the expansion of military spending during his administration. Since when are tax cuts not Keynesian? This from Edward Harrison at roubini.com:
So, was Ronald Reagan a libertarian who also appealed to populist anti-intellectuals and was pragmatic in economic decision-making and taxation? Or was he a closet Keynesian who presided over a large increase in government spending and used fiscal policy to steer the economy?
Sorry, but fiscal policy (tax cuts) and big spending (military) sure sound Keynesian to me. And America tends to embrace them. I think in the case of redistributionist Keynesianism, it’s inherently a harder sell. Defense is spending for the common good. Wall Street bailouts, “spreading the wealth around,” and cash for clunkers is not.
Oh, and just in case you weren’t around in the 80’s (or weren’t looking for work like I was), the positive effects of the Reagan stimulus were profound.
From the Economist:
“No one expects, say, a repeat of the blazing recovery of Reagan’s re-election year, when GDP rose by 7.2%.”
Article here.
“But unlike the mild downturn of 2001, the 1981 version was severe, with soaring unemployment and plummeting output. The recovery, however, was quicker and more dramatic. Helped by big tax cuts, America boomed. In 1982-84, American domestic demand grew almost 15%, against less than 3% in Europe and 5% in Japan.”
Article here.
The problem with Keynesian stimulus? It ‘aint cheap even when done right. You end up with deficits. Although these charts from an old post of mine makes the case for the Reagan approach as being more cost-effective.
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