A rather desultory opening to what is billed as a celeberity death match featuring Brad DeLong and Luigi Zingales on whether we are all Keynesians now. Luigi writes,
I do not think that any economist would dare to say that the current US economic crisis has been caused by underconsumption. With zero personal saving and a large budget deficit the Bush administration has run one of the most aggressive Keynesian policies in history. Not only has adherence to Keynes's principles not averted the current economic disaster, it has greatly contributed to causing it.
In my opinion, it is unfair to Keynes to imply that his view of slumps is that they are caused by underconsumption. His primary explanation for a slump was a decline in "animal spirits" in the business sector. Another explanation was an increase in "liquidity preference" among households and investors. Both explanations apply in today's economy, although in modified form.
The loss of "animal spirits" can be seen in the housing market, which is no longer animated by the spirit of ever-rising values. "Liquidity preference" can be seen in surge in demand for U.S. Treasuries, with both institutional and individual investors dumping all other securities as too risky.
What I think should be debated is the question of what is the right prescription for the economy today. I don't believe that the answer is "government spending, no matter where or when," although a well-thought-out tax cut might be constructive.
I think that a lot of the job losses that we are seeing reflect the fact that the economy is trying to restructure itself. We don't need so much finance, print media, and shopping malls. We probably need more businesses that take advantage of new technology to deliver better forms of education, health care, and entertainment. Getting from here to there is going to be painful, and "stimulus" is probably going to have very little affect on the path that the economy ultimately takes.