Keynesianism in 2009

"We're all Keynesians now," stated Milton Friedman in a 1965 article in Time magazine. Friedman, famous for a conservative brand of economic policy, was actually quoted out of context and clarified the record several weeks later. Forty-four years later, Keynesian economic policies have been the subject of much mainstream debate and widely accepted in Washington and on Wall Street.

As the U.S. economy continued to slide at the beginning of 2009 and Barack Obama was set to take office, Nancy Pelosi and Harry Reid set out to craft an economic stimulus package designed to provide a jolt to the economy. The economic orthodoxy was out in full force suggesting that the only way we could stem rising unemployment was to close the output gap by increasing aggregate demand. Paul Krugman, for example, suggested that we could stem unemployment by one percentage point for each $300B of GDP impact.

The debate over the size of the stimulus, the type of "multipliers" that different forms of stimulus would have, and the timing of the stimulus raged on the Sunday shows and in the blogosphere. Meanwhile, the politics of the debate heated up as the GOP solidified their position to vote against the stimulus despite agreeing that stimulus was needed. Meanwhile, post-Keyensians such as Steve Keen and economists of the Austrian school continued to debunk the claims of the mainstream.

The failed pseudo-science of neo-classical economics continues to maintain its mythical status of a robust theory. Multipliers, Okun's Law, and other such theory extend weak statistical correlations to prescribe public policy. What makes this worse is the stronghold that the neo-classical views have in academia and in the government (see here for a detailed account). All of this enables politicians to use the musings of Ph.D. economists as fodder for pork and political gain.

Alas, the forecasts of the economic policy makers were wrong, and the economic policies of the Federal Reserve and the U.S. Treasury enabled the financial crisis. But, as long as heterodox voices are ignored, those with power will continue to spin data and reality to claim success and maintain their positions of influence. We should all remain as Keynesians at our own peril.