Sunday, 20 October 2013

Keynesianism and Big Government

I was intrigued by a piece at Mark Thoma's blog on ideology-and-macroeconomics.

Mark looks at a conversation between Arnold Kling and Scott Summer on whether keynesian economics always leads to bigger government. The short answer is of curse it doesn't.
John Quiggin and Henry Farrell showed this some time ago as well.  (Quite ironically they show that keynesian economics is much tougher on fiscal policy in the good times than classical economics is.)

Let us do the expurgated version. Stimulus projects are always of a short -term nature. So at some time the expenditure finishes and you are back to where you were beforehand.
A look here confirms this for Australia.

Arnold Kling claims that although Mark Thoma and Paul Krugman agree with the hard keynesianism in good times they are yet to advocate this in the USA.

Me thinks Arnold has forgotten the lessons of 1937 in the USA and a repeat in Japan in the 90s where premature fiscal tightening cut off a budding recovery. This is why most fiscal consolidation programs are gradual. I know both Kruggers and Mark are well aware of this in the USA and the US recovery is by no means robust as yet otherwise the Fed would not be still engaging in QE!

In Australia our economy is in slowdown mode as mining softens and the terms of trade has lead to below trend nominal GDP growth rates.Now is not the time here to engage in fiscal consolidation. You simply let the automatic stabilisers do their job. This means no fiscal stimulus as well.

All in all this is yet another example of some people having little idea of what keynesian economics entails.

( I am not including Arnold nor Scott in this comment by the way.)