Alex Tabarrok has a thought-provoking post on the failure of Keynesian politics. Not the failure of Keynes’ economic theory as a policy solution to recessions, but the political failure to manage to implement a Keynesian policy.
Let’s accept for the sake of argument the truth of Keynesian economics. It is now clear that Keynesian politics has failed. But don’t take my word for it. Here’s Paul Krugman on the great abdication:
…without saying so explicitly, the Obama administration has accepted the Republican claim that stimulus failed, and should never be tried again.
What’s extraordinary about all this is that stimulus can’t have failed, because it never happened. Once you take state and local cutbacks into account, there was no surge of government spending.
If that sounds familiar let’s remember that by their own admission Keynesians believe that Keynesian politics also failed during the Great Depression. Again, Paul Krugman on the New Deal:
…you might say that the incomplete recovery shows that “pump-priming”, Keynesian fiscal policy doesn’t work. Except that the New Deal didn’t pursue Keynesian policies. (emphasis in original).
So we have had two major cases that massively favored Keynesian economics but Keynesian politics failed both times…
…Thus, if we can’t count on massive increases in government spending during a recession to mop up problems ex-post shouldn’t we all, Keynesians and otherwise, be spending more time thinking about ex-ante alternatives to Keynesian politics?
I had two immediate thoughts in response. The first was that I am inclined to be somewhat less generous than Tabarrok is being here. The Keynesians argument that the two most Keynesian moments weren’t really Keynesian at all strikes me as a bit of special pleading. The second was that if it’s not, and they’re right about there never having been a true Keynesian stimulus, it wouldn’t really surprise me, as Keynesianism has always struck me as requiring an astonishingly naive about government, holding what I call the candy machine theory of government–put your money in, push A4, and you get exactly the Snickers bar you wanted. Keynesian economists put a tremendous amount of effort they put into analyzing human economic behavior, then put their analytical tools on the shelf when they shift to looking at the political realm, treating it as almost purely mechanistic, or at least that it would be if we just had the right people in power. Any economist who consistently applies their economic analysis to political behavior–i.e., public choice theorists–would be highly skeptical of any policy proposal that requires discretionary political action. Hence, on the assumption that fiscal policies are effective, Tabarrok argues for more automatic stabilizers and less reliance on political choices.
Ezra Klein agrees, and makes the interesting suggestion of making unemployment compensation automatically last longer when the unemployment rate hits a certain pre-determined percentage, to strengthen the automatic stabilizing force of it. An imperfect and rough policy? Sure, but less imperfect and rough than relying on contemporary policymaking.
Krugman concurs, but argues that the failure of discretionary fiscal policy makes an even stronger case for a higher inflation target by the Fed–4-5% instead of 2%–so there would be more room for discretionary monetary policy. It’s true that this would provide more room for monetary policy to work, but does an argument for less discretion in fiscal policy really lead to an argument for providing more slack in monetary policy? I don’t see the logical connection there.