So lately I've been doing some reading by the economist John Cochrane. According to him, Keynesian economics and fiscal stimulus have actually been mostly rejected by macroeconomics for decades now. That no major economics textbook teaches Keynesian policy or fiscal stimulus except for its fallacies, no respected economics program teaches Keynesian policy or fiscal stimulus except for its fallacies, and no major academic journal in economics has seen a policy simulation based on a Keynesian model in decades.
Fiscal Stimulus, RIP (also check out Mr. Cochrane's other articles on stimulus at his website: John Cochrane's Webpage
He says that the advocates of fiscal stimulus say that the economics profession lost its mind starting around 1975, but in his opinion (and that of other economists), it actually began to finally regain its mind around this time after having already lost it for many years prior. This is the view I would be much more inclined to hold as well, because starting in the 1930s with the introduction of Keynesian doctrine, economics also became dominated by socialists as well.
If you had walked into an economics department in the 1950s or 1960s and said socialism doesn't work and free-market capitalism is the best way to organize an economy, you'd have been considered a borderline radical or a nut. The late great economist Milton Friedman was for many years regarded as such and was called many nasty things by people who disagreed with him.
The late economist John Kenneth Galbraith for example, a Keynesian to the core, was also a believer in socialism, having traveled to Mao's China and praised it as a wondrous example of how to organize an economy (nevermind Mao killed more people via his socialism than pretty much anyone else in history, mostly through starvation).
ANYWAYS, I am going way off-topic, the point of this post then, is that, if modern macroeconomics mostly has rejected Keynesian policy except for a few holdouts such as Paul Krugman, Brad DeLong, Joseph Stiglitz, etc...(well-known stimulus skeptics include Greg Mankiw, Eugene Fama, John Cochrane himself of course, Robert Barro, and John Taylor), then why do so many politicians adhere to it?
Well, my personal thoughts on this are that politicians adhere so much to Keynesian doctrine for about four primary reasons:
1) Leftist-leaning politicians are in particular prone to lean towards Keynesian policies. I think this is because many on the Left never quite got over the fact that socialism failed. An important point to remember is that it wasn't until the Soviet Union finally dissipated that it became very apparent that socialism (central planning) flat-out did not work, that it could not work. Even conservatives and libertarians who knew this all along, were shocked at the degree of decay and devastation that was within the former Soviet Union when it finally broke apart.
I will us some quotes from Natan Sharansky's book The Case for Democracy: The Power of Freedom to Overcome Tyranny and Terror:
"In the early 1980s, when some were actually arguing that the Soviet Union could be challenged, confronted, and broken, the possibility was dismissed out of hand. The distinguished historian Arthur Schlesinger Jr., espressing the sentiments of nearly all of the Sovietologists, intellectuals, and opinion makers of the time, said that 'those in the United States who think the Soviet Union is on the verge of economic and social collapse, ready with one small push to go over the brink are wishful thinkers who are only kidding themselves.'" (bolding mine, and from the Introduction, page 7).
"When Reagan took office, and indeed throughout almost his entire presidency, few people believed that the USSR was seriously in danger of implosion. In 1984, the distinguished Harvard economist John Kenneth Galbraith noted admiringly that 'for the first time in its history the Soviet leadership was able to pursue successfully a policy of guns and butter as well as growth...The Soviet citizen-worker, peasant, and professional---has become accustomed in the Brezhnev period to an uninterrupted upward trend in his well-being.' That same year, Galbraith would also claim 'that the Soviet system has made great material progress in recent years' and that 'the Russian system succeeds because, in contrast with the Western industrial economies, it makes full use of its manpower.'" (bolding mine, and from the chapter Mission Possible, page 133).
(note John Kenneth Galbraith, the same economist who also had travelled to China and praised Mao's economy)
"In 1985, Paul Samuelson, the Nobel Prize-winning economist well known to American college students for his introductory textbooks on economics, was even more lavish in his praise for the Soviet's command and control economy: What counts is results, and there can be no doubt that the Soviet planning system has been a powerful engine for economic growth...The Soviet model has surely demonstrated that a command economy is capable of mobilizing resources for rapid growth.'" (bolding mine, from Mission Possible, pages 133-134).
So we can see from the above just how strong the Leftist belief in socialism was up until the Soviet Union collapsed. That socialism turned out, to use a modern phrase, to be the be Epic Fail of the Century, really irked many of them. Keynesian economics, of course, provides the second-best alternative. A free-market economy is what's needed, but it must still be guided by the "wise hand" of the government. To have to acknowledge that this doctrine of economics is also not true is just too much for many a Leftist.
2) A second reason is that Keynesian economics is the perfect justification for big-government spending. Politicians and bureaucrats love to spend money. That's how they win votes or win prestige. Elected politicians love to promise "freebies" to the general public, and bureaucrats who run government agencies are given an allotment of money to spend. Their job is to spend all of it and then they can demand even more money for their agency. If they fail to spend all of it, then the government will reduce their budget because they apparently didn't need all that money in the first place. To the head of any government agency, this of course doesn't look good. You want to get the largest budget possible for your agency, that is what wins you prestige and advancement. Failing to get a larger budget can get you fired.
In my own opinion, the Left has somewhat warped Keynesian doctrine because it doesn't call for structural increases in government spending; it doesn't literally call for big government. It in fact calls for fiscal consevatism, to run a balanced budget with a healthy surplus in good economic times, so that when a recession hits, you can gun up spending to stimulate the economy out of said recession, upon which you then curtail spending after the economy recovers so you can focus on paying down the debt and deficit you built up.
Instead, the Left has kind of perverted Keynesianism to justify permanent increases in spending. But nonetheless, any policy that calls for massive-scale government spending, and also claims that it doesn't matter how the money is spent even, just that you spend it, will be music to a politician's ears, even if only meant for recessions or to be temporary.
Hence, the Left is very reluctant to have to acknowledge that Keynesianism is no longer viable. We can see this especially with the Democratic party's so-called stimulus under President Obama, which was more of a wishlist of spending programs on all sorts of things Democrats have wanted to spend money on for decades.
3) It doesn't sound good from a political standpoint. One of the myths that much of the general public seem to adhere to is that the President, and to some degree Congress, "manage" the economy. This is of course, mostly nonsense. Congress can write laws, which create regulations over the economy, they can create regulatory agencies, and they can raise or lower taxes, all of which can have an affect on the economy, but otherwise, the economy is a mostly self-functioning mechanism of extraordinary complexity. The President even less-so, as the President does not technically raise or lower taxes, write laws or create regulations. They have to have the cooperation of the Congress for all of this if they want to do it. When Ronald Reagan "cut taxes," what that really means is the Congress passed tax cuts that Reagan asked for.
So if the economy is bad, and a politician is running for office, it doesn't really sound good if they say to a crowd, "Yes, the economy is bad, but there really isn't anything I can do about it. The government has little to no ability to actually stimulate the economy, all we can do is mantain a relatively hands-off approach and hope for the best." That doesn't work, at least not during elections.
The only exceptions would be if taxes are prohibitively high, and/or regulations are too excessive, then reducing regulations, reducing tax rates, allowing privatization of nationalized industries if a country has such, working to reduce a debt and/or deficit if it is too excessive, these kinds of things are ways a politician can create a direct economic turn-around. But once these things have been done, there isn't much else a politician can do.
No politician wants to say they are powerless to "fix" the economy or they won't get elected. The simplistic idea is, "The other guy/party was in office, the economy tanked under him/them, so 'obviously' he/they 'managed' the economy badly, therefore, vote for me and/or my party and we'll manage it correctly."
4) Ideology. Unfortunately, for most people, economics is not really a quest for truth. It isn't really a quest for knowledge about how economies actually work, it is more a set of debating points to argue for a set of policies which one has arrived at due to an ideology. Acknowledging that Keynesian economics is not viable is a severe blow to the ideology of the Left, because it means government needs to have a far more diminished role in the economy than they think it should have.
No comments:
Post a Comment