The Political Failure of Keynesian Economics
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."
When people like Paul Krugman say that almost $900 billion in stimulus didn't work because it wasn't big enough, you have to wonder if an adequate Keynesian stimulus is even possible. Could any government anywhere borrow 15 percent of GDP or more to spend on temporary measures with the blessing of their citizens? For that matter, would the markets lend the money without ratcheting up interest rates? Can an extra 15 percent of GDP be spent without showing sharply diminishing returns—meaning that you'd need even more spending to generate the effects you want? Today Alex Tabarrok looks at the history and concludes that even if Keynesian economics works in theory, Keynesian politics fails in practice—at least in a Democracy:
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.
This is true—but at some level, there's no point in spending a lot of time designing policies which can't be enacted in any conceivable democratic polity. Especially if advocating those policies make it hard to advocate things that might work—either because the advocacy takes time away from thinking about feasible solutions, or because you alienate the people you are trying to influence.