Why keynesian economics doesnt work

Today Alex Tabarrok looks at the history and concludes that even if Keynesian economics works in theory, Keynesian politics fails in practice—at least in a Democracy:.

This illustrates a challenge facing economists: should they advocate first best or second best policy? I once saw an exchange between a Bush treasury official and a prominent academic critic of TARP, etc. The official argued that the critics were putting forward "solutions" which had no hope of passing congress. The critic sharply rejoindered that it wasn't his job to suggest stupid things that politicians were willing to do; it was to tell them the right thing to do.

This is true—but at some level, there's no point in spending a lot of time designing policies which can't be enacted in any conceivable democratic polity.

They recycled the tax revenues that accrued from robust growth into higher spending on public infrastructure. They took steps to ensure that there was a narrowing of the gap between rich and poor.

The bad news was that the lessons were eventually forgotten. Keynes discovers that governments deviate from his ideas. Instead of running budget surpluses in the good times and deficits in the bad times, they run deficits all the time.

They fail to draw the proper distinction between day-to-day spending and investment. In Britain, December was the pivotal moment. Matters came to a head in early December when a divided and fractious cabinet agreed that austerity was a price that had to be paid for a loan from the International Monetary Fund , which was needed to prop up the crashing pound. Subsequently, Keynes is informed, there was a paradigm shift.

Labour had been reluctant converts to monetarism; the Thatcherites who followed were true believers. Controls on capital were lifted, full employment was abandoned as the prime policy goal, trade union power was curbed, taxes for the better off were cut, inequality was allowed to widen, finance waxed as manufacturing waned.

Bashing organised labour and cutting government spending led to a dearth of effective demand that was papered over by cuts in interest rates. Cheaper money led to some increase in productive investment but this was overshadowed by speculation in the stock market and real estate. Eventually, the bubble burst and — just as in — there was a stupendous crash. That explains why the headlines I can see from bear so much resemblance to those from high unemployment and a lack of growth that has bred deep public resentment.

The Ryan and Simpson-Bowles budget proposals are a constructive start. Note to Republican presidential candidates: Permanent tax reduction can only be achieved by reducing government spending. Second, reduce corporate tax rates and expense capital investment by closing loopholes. Third, announce a five-year moratorium on new regulations.

The problem is spending. Deficits and debt are just symptoms of that disease. Live Now. Cato at Liberty. Blog Home RSS. Email Signup Sign up to have blog posts delivered straight to your inbox!

Banking and Finance. Constitutional Law. Criminal Justice. Defense and Foreign Policy. So, how is it that two experienced, knowledgeable economists study and analyze the same data and each comes up with a different forecast for the nation's economy? Why do these experts so often disagree with one another?

As we will see, there's no simple answer; there are many reasons for economists' differing opinions. The principal disagreement among economists is a matter of economic philosophy. There are two major schools of economic thought: Keynesian economics and free-market, or laissez-faire , economics. Keynesian economists, named after John Maynard Keynes , who first formulated these ideas into an all-encompassing economic theory in the s, believe that a well-functioning and flourishing economy may be created with a combination of the private sector and government help.

By government help, Keynes meant an active monetary and fiscal policy , which works to control the money supply and adjust Federal Reserve interest rates in accordance with changing economic conditions. By contrast, the free-market economists advocate a government "hands-off" policy, rejecting the theory that government intervention in the economy is beneficial.

Free-market economists—and there are many distinguished advocates of this theory, including Nobel Memorial Prize winner Milton Friedman —prefer to let the marketplace sort out any economic problems.

That would mean no government bailouts , no government subsidies of business, no government spending explicitly designed to stimulate the economy, and no other efforts by the government to help what the economists believe is the ability of a free economy to regulate itself.

Both economic philosophies have merit and flaws. But these strongly advocated and conflicting beliefs are a major cause of disagreement among economists. Moreover, each philosophy colors the way these warring economists see both the macroeconomy and microeconomy.

As a consequence, their every pronouncement and the economic forecast are influenced in large measure by their respective philosophical biases. Besides their elementary philosophical differences, disagreements among economists arise because of a variety of other factors. Let's stipulate that economics is not an exact science, and often unforeseen influences may occur to derail the most successful forecaster of economic conditions.

These would include but are not limited to, natural disasters earthquakes, tsunamis, droughts, hurricanes, etc. As a result, an x-factor must be included in every economic equation to account for the unknown and unpredictable. When forecasting the future of the economy—short-term, mid-term, and long-term—economists may study some or all of the following data, as well as additional data.

Most economists have a personal opinion about what numbers are the most useful for forecasting the future. Assume now that three economists look at some or all of the above data and make three different forecasts for the U. Analyzing and interpreting economic data is both an art and a science. In its simplest scientific aspect, economics is generally predictable.