Stephen Moore, a member of the Wall Street Journal's editorial board, wrote an editorial in the Wall Street Journal that ran in August 19, 2011, called "Why American Hate Economics." He may as well entitled it, "I Don't Understand Keynesian Macroeconomics." Mr. Moore is the co-author with economist Arthur Laffer of the screed Return to Prosperity. In his article, Mr. Moore attacks what he perceives to be elitist Keynesian economics.
Mr. Moore says that the idea that raising unemployment insurance benefits will increase aggregate demand, leading to higher levels of employment is "nonsensical". He characterizes unemployment as taking money from those who work and giving it to those who do not. His implication is that taxing employment and subsidizing unemployment would tend to diminish employment, but leaves out that all-important phrase "ceteris paribus", all else equal. This seems like a reasonable proposition, if one specifically excludes effects on income and aggregate demand. Clearly unemployment insurance creates incentives for somewhat longer search times for new employment (and research shows higher acceptance wages) and there should be some effect of taxation on work incentives. What is "nonsensical" is assuming that these effects completely overwhelm the countervailing tendency of the income support or, even worse, as Stephen Moore appears to do, completely ignoring the opposing force.
Mr. Moore ridicules the Center for American Progress forum, where he says an argument was put forward that raising the minimum wage would create jobs. He seems to believe that this implies an upward-sloping demand curve. Mr. Moore says, "For this to be true, you have to believe that the more it costs a business to hire a worker, the more workers companies will want to hire." Except, that there are two tendencies here, as well. First, there is the demand of firms, leaving aggregate demand out of the picture. One would imagine that in such a scenario, lower wages means more employment. But there is the role of aggregate demand. Low wage workers might tend to spend a large percentage of their income, so that raised wages might generate enough aggregate demand shift the demand curve for business enough an equal or greater amount of workers or worker-hours are employed. I would not say a priori what the outcome will be without crossing my t's and dotting my i's, but Stephen Moore sounds like he did.
Mr. Moore mischaracterizes the multiplier as a fundamentally untenable idea. He says, "There was never any acknowledgment that for the government to spend a dollar, it has to take it from the private economy that is then supposed to create jobs. The multiplier theory only works if you believe there's a fairy passing out free dollars." Well, that just is not the way the multiplier works and it just shows that Mr. Moore either does not understand the theory or chooses to completely misrepresent it. I gave a decent summary of the multiplier process in paragraphs four and five in Four Arguments I Don't Buy. Basically, the reason the multiplier works is the difference in the marginal savings rates of those who are taxed (if anyone is) and those to whom it is transferred. In the case of the government, it spends just about everything it takes in, so the multiplier will be higher than a transfer to individuals who may save some of the money. From the first round, you get a benefit, then in each subsequent round of spending there is a little extra. When all is said and done, the extra amount spent in the first and subsequent rounds adds up to the multiplier. Stephen Moore needs to explain why this is not true, with more than hand-waving and generalities about taxing and spending.
Mr. Moore discusses "the New Deal decision to pay farmers to burn crops and slaughter livestock to keep food prices high," as if that is a Keynesian prescription. He further says that "Keynesians believe that the economic problem is abundance." But that is completely wrong. First, destroying capital is not a Keynesian policy. The policy prescription of early Keynesians during the Great Depression of the 1930s were raising aggregate demand by deficit spending and/or an easy monetary policy. Three confirmations of the theory were readily available. First, as David Glasner (a non-Keynesian economist) has pointed out, the suspension of the Gold Standard and lowering the value of the dollar relative gold started a recovery (easy monetary policy). Second, the "Mistake of 1937", when the federal government cut the deficit and the Federal Reserve tightened monetary policy caused the economy to return to recession. Third, the U.S. economy finally left the Great Depression thanks to the huge Keynesian stimulus known as World War II (which was also accompanied with easy monetary policy and wage and price controls to prevent excessive inflation). Mr. Moore ought to take more care to point out relevant examples, not unrelated nonsense.
Mr. Moore relates a quote from the economist Arthur Laffer who said, "All economic problems are about removing impediments to supply, not demand." Who exactly has the bad economics? All Keynesians I've paid attention to do not say that all economic problems are about aggregate demand. I am convinced that if you look at the evidence of economic conditions, you will agree that aggregate demand can be the main problem. This current depression is proof.