Peter Smith

Keynesian unto death

Keynesian economics versus commonsense

“So, your prescription, if there was a recession, would be to cut Government spending as hard as you possibly could?” This was Chris Uhlmann (7.30 Report, 16 August) talking about the possibility of another economic downturn and enticing Joe Hockey into supporting a policy even more callous than not increasing spending. Mr Hockey didn’t fall for it; he’s onto these ABC journos.

In fact, Mr Hockey believes in stimulus spending just less of it than does the government. I know this because he has lamely said so in the past. Let’s face it; there is no profit in denying the worth of Keynesian economics. It would be up there with denying climate change.

Mr Uhlmann “knows”, even without studying economics, that only an unfeeling fool would suggest that a recessed economy would do better without stimulus spending. He knows that it would be tantamount to allowing the unemployed to grow in numbers and suffer dreadfully.

When he returns from vacation in September, President Obama has promised to set out (on a tablet of stone perhaps) his new jobs policy. This will undoubtedly contain yet another fiscal stimulus, even though the last massive stimulus has been followed by higher unemployment. Surely it didn’t work? In fact it looks as though it made the economy worse. That sounds a little bit like commonsense.

Commonsense has no chance of breaking through into the intellectual stratosphere yet it finds expression in everyday life. Contrast the views of Robert Reich, professor of public policy at the University of California, with Spanish demonstrators in Madrid protesting against the expense of the Pope’s recent visit.

Professor Reich has a rich and distinguished academic and public service background. He has written twelve books. He was secretary of labor under President Clinton and was named by Time magazine as one of the ten most successful cabinet secretaries of the century. He has degrees from Dartmouth, Oxford and Yale. And there is much more. He lists macroeconomic policy as an area of expertise.

He was interviewed on CNN about the current faltering state of the United States’ economy. Too little aggregate demand was his diagnosis; another stimulus the remedy. His fellow interviewee Stephen Moore, economist for The Wall Street Journal, made the point that this had been tried without evident success. This never fazes the conviction Keynesian. He offered the unassailable argument: not enough was done and without anything being done even worse things would have happened. Dr Moore was not confident enough to mount a challenge to this tautological fortress. Keynesianism triumphed again.

As against this intellectual tour de force the protesters in Madrid, quite obviously, were economic nincompoops. Unemployment in Spain is around twice the rate as in the US. If aggregate demand needs boosting in the US; it needs turbo-charging in Spain. Yet they were objecting to the cost of hosting the Pope. Presumably Professor Reich would be aghast; clearly the more money the Spanish government spent on the Pope’s visit the better. Lavish spending surely lowers unemployment, boosts the economy, and fills government coffers with revenue.

The problem is that the demonstrators probably didn’t have an economics degree between them, and certainly not a higher degree. They simply had to rely on commonsense. Professor Reich and most other economists took years to drum that out of their systems. Prior to learning about the wonders of Keynesian economics they too would have thought that spending money is often the way to ruin and seldom the way to prosperity.

How does Keynesian economics trump commonsense. Simply, it offers governments a way to be seen to be doing things. Doing things is looked on with more favour than not doing things, even when commonsense tells you that doing nothing would be better.

You are a poor swimmer (the government). A better swimmer than you (the private sector) is struggling to make shore. Commonsense tells you to stay ashore. But that is not a good look so you dive in. The better swimmer almost drowns trying to save you. Fortunately, the Keynesian economists onshore will make the claim, on your behalf, that the better swimmer would have drowned had you not dived in. Your heroic reputation for helping will be assured.

Commonsense can break out among non-economists at times, e.g., among Spanish demonstrators. Other than that we are mostly stuck with crackpot economics passed down in universities year after year until it has become part of the furniture. Maybe the marginalised sound Classical/Austrian economics of economists like Steven Kates here and Thomas Woods in the US will eventually change the course of the intellectual debate. But it would be best not to underestimate the vested interest in the current Keynesian conventional wisdom; however flawed. If there is another economic downturn watch Mr Swan and Dr Parkinson conspire to put us all into more debt to “save” the economy.


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