May 8, 2013 | 56 comments
March 20, 2013 | 204 comments
February 25, 2013 | 70 comments
February 14, 2013 | 203 comments
October 19, 2012 | 148 comments
The stimulus has failed, and John Maynard Keynes is to blame.
It’s now clear that the federal government’s massive stimulus spending has not achieved its objectives. Why hasn’t it? It’s important that we have answers to that question.
The stimulus was premised on the economic model known as Keynesianism: the intellectual legacy of the late English economist John Maynard Keynes. Keynesianism doesn’t work, never has worked, and never will work. Without a clear understanding of why Keynesianism cannot work we will be forever doomed to pursuing the impossible.
There’s no real mystery about why Keynesianism fails. There are numerous reasons why and they’ve been known for decades. Keynesians have an unrealistic and unsupportable view of how the economy works and how people make decisions.
Keynesian policy advocates focus primarily on the short run — with no regard for the future implications of current events — and they assume that all economic decision-makers do the same. Consider the following quote by John Maynard Keynes: “But the long run is a misleading guide to current affairs. In the long run we are all dead. Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is long past the ocean will be flat again.”
After passage of the stimulus package, Lawrence Summers, Obama’s chief economic advisor at the time, often said that the spending should be “timely, targeted, and temporary.” Although those sound like desirable objectives, they illustrate the Keynesian focus on the short term. Sure it would be convenient if you could just spend a bunch of money and make the economy get well, but it’s not that simple.
The implication of a Keynesian perspective is that you can hit the economy a few times with a cattle prod and get society back to full employment. Remember that so-called “cash-for-clunkers” program? Maybe it accelerated some new car sales by a month or two, but it had no lasting impact.
The “Chicago School” is the primary source of serious research and analysis related to the Keynesian model. Two Chicago School conclusions, in particular, make it clear where Keynesian policies run aground. The two theories are the “permanent income hypothesis” and the theory of “rational expectations.”
The “permanent income hypothesis” was how Milton Friedman termed the findings of his research on the spending behavior of consumers. The MIT Dictionary of Economics defines the permanent income hypothesis as “The hypothesis that the consumption of the individual (or household) depends on his (or its) permanent income. Permanent income may be thought of as the income an individual expects to derive from his work and holdings of wealth during his lifetime.”
Whether consumers and investors focus mostly on the short run or the long run is basically an “empirical question.” A convincing theoretical case can be made either way. To find out which focus actually conforms closer to reality, you have to gather evidence.
Much of the difference between the two schools of thought can be explained by differences in their methodologies. Keynes was not known for his research or empirical efforts. Keynesianism is definitely not an evidence-based model of how the economy works. So far as I know, Keynes did no empirical studies. Friedman was a far more diligent researcher and data collector than was Keynes. Friedman fit the theory to the data, rather than vice versa.
The Keynesian disregard for evidence is reflected in their advocacy for more stimulus spending even in the face of the obvious failure of the what’s already been spent. At a minimum, we are due an explanation of why it hasn’t worked. (Don’t expect that to be forthcoming, however).
Failure to Consider Incentives
Another of the Chicago School’s broadsides against Keynesianism is the theory of “rational expectations.” It’s a theory for which the 1995 Nobel Prize for Economics was awarded to Robert Lucas of the University of Chicago. As economic theories go, it is relatively straightforward. It essentially states that “individuals use all the available and relevant information when taking a view about the future.” (MIT Dictionary of Modern Economics) The rational expectations hypothesis is the simple assertion that individuals take into account their best guesses about the future when they make decisions. That seemingly simple concept has profound implications.
A man of faith in a godless age is hitting Americans where it hurts.
Mr. and Mrs. American Spectator Reader, let P.J. O’Rourke talk sense to your kids.
In Britain, defending your property can get you life.
The debacle of this president’s administration is both a cause and a symptom of the decline of American values. Unless Congress impeaches him, that decline will go on unchecked. An eminent jurist surveys the damage and assesses the chances for the recovery of our culture.
It won’t take long for conservatives to scratch this presidential wannabe off their 2008 scorecard.
The American Christmas, like the songs that celebrate it, makes room for everybody under the rainbow. Is that why so many people seem to be hostile to it?
Was the President done in by the economy, or by the politics of the economy?