Tuesday, November 15, 2011

Right justification, wrong policy

Harry Dexter White in 1935, via Eric Rauchway, via Paul  Krugman:

There were, in meeting the crisis of the 1930s, two positions.
(a) Let the Government spend the minimum necessary to keep men alive and to prevent social disturbance; or

(b) Let the Government spend on such a large scale as to provide a positive powerful stimulus to recovery.

This second alternative is often formally embraced by those who in practice support the first position. That is, the actual scale of expenditures that they propose, while sufficient to bring about a serious derangement of the budget, is not sufficient to exert an adequate stimulus to recovery. In consequence, depression conditions tend to be frozen over a considerable period.

Basically, this is a pretty good explanation for why the stimulus signed into law by President Obama in 2009 failed to achieve a restoration to full employment.  Yes, it was advocated on the grounds that the United States economy needed a strong stimulus, but the one that was actually passed was the minimum necessary to keep men alive and to prevent social disturbance.  In other words, it was big enough to keep the unemployment rate well below 15%, but not enough to bring it to the presumed "natural rate" of unemployment (somewhere between 4 and 5.5%, depending on the economist).

Are the Keynesians relegated to providing arguments which are used to merely prevent severe unrest, rather than achieving what they set out to do, to bring the economy back to full employment?  As many economists have pointed out, the large stimulus program which ended the Great Depression was World War II, not large-scale public works, as John Maynard Keynes actually advocated.  Okay, there is an exception.  Sweden most nearly built itself out of the Great Depression, so apparently advocating a Keynesian stimulus is not foredoomed.

The whole issue brought up by the quote above makes me think of Aesop's Fable of The Wolf and the Lamb.  Ultimately, I think it has more to do with a predominant politics which revolves more around political games than principled action on economic theories that work well in practice.

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