Thursday, September 8, 2011

More on the dismal state of economics, as a discipline

As we prepare for the grand unveiling of the admin's new plan to increase jobs, it's worth looking at what's really going on here. There have been plenty of editorials out there making the argument that this is all about Keynesian theory on one side and non-Keynesian theory on the other, about whether or not the government can literally create jobs.

But as Mike Whalen--via Nick Gillespie at Reason Magazine--points out, Keynesian theory was dumped a long time ago, in favor of nothing more than just spending, then spending some more.

Supposedly, government spending would--via the "multiplier effect"--increase spending in the private sector. According to the admin, this increase would be quite large (a multiplier effect of four or more), while according to other economists it might be quite small (possibly a multiplier effect of less than one). Of course, this is all theory, based on a traditional paradigm of economic theory that fails dismally to account for the complex, open nature of the actual economy.

Still, at this point in time we have hard evidence: the results of the previous "Stimulus" plan. And that evidence--viewed dispassionately--hardly suggests that there has been any kind of multiplier effect. Exactly the opposite.

However, as Whalen and Gillespie note, the circumstances don't allow for actual an actual Keynesian approach, because of the past behavior of the federal government.

I think John Maynard Keynes would be horrified at the slavish adherence to this simplistic strategy by so many policymakers and economic thinkers, as his theory was much more complex. This thinking might be correct under circumstances other than those in which we find ourselves. If the ratio of our national debt to gross domestic product was low - say 25 percent - and the federal government had run surpluses before the downturn, this college freshman-level Keynesian analysis would have great weight. Put another way, if Uncle Sam were a rock-solid financial entity with low debt to value and he had judiciously used debt for capital improvements that were accretive in value, as the biggest dog on the porch, a stimulus might work.
If the federal government had a strong track record of responsible spending, it would mean one thing if it went into hock for a short period of time to goose the economy (again, whether this would work is open to question). It means something totally different when a government that spent all of the 21st century piling on debt and new, long-term entitlement programs responds to an economic downturn first by creating yet another gargantuan entitlement (Obamacare) and taking on even more debt in the here-and-now. This cuts in a Milton Friedmanesque, monetarist direction too. If the Federal Reserve had not been keeping money artificially cheap for the past couple of decades and it worked to lower interest rates and increase the availability of money in a given moment, that would mean one thing. Promising to keep rates low for the next couple of years - after years of loose money and statements that all those bubbles weren't bubbles at all  - doesn't mean the same thing.
What we're dealing with here--when it comes to the economic policies of DC--is not Keynesian, anti-Keynesian, or anything resembling sound theory. It's "we're gonna do something so we can say we did something, and if things turn around we'll claim credit."

And amazingly, this sophomoric kind of thinking is being backed to the hilt by economists supposedly at the top of their profession. Hell, some of them even have a Nobel prize in their living room. Maybe it's time to take a hard look at what is actually being taught to economics students on college campuses, because it sure doesn't seem to be actual economics...

Cheers, all.

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