Last August I asked a question: "What if Keynesian stimulus works, but no one can ever actually afford to do it, short of something like World War II, where the government can tap into a patriotic outpouring of national savings by issuing bonds with negative real yields."
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 Keynesian's 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.
This illustrates a challenge facing economists: should they advocate first best or second best policy? I once saw an exchange between a Bush treasury official and a prominent academic critic of TARP, etc. The official argued that the critics were putting forward "solutions" which had no hope of passing congress. The critic sharply rejoindered that it wasn't his job to suggest stupid things that politicians were willing to do; it was to tell them the right thing to do.
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