“How dead is Keynes?” asked economist James Tobin in 1977, when Keynesian economics was starting to lose ground in economics departments to more theoretically elegant alternatives like new classical economics, and when the stagflation of the mid-1970s sapped many people’s confidence in Keynesian policy prescriptions. Tobin said Keynesian economics was still the best macroeconomic theory out there, and that standard Keynesian pump-priming remedies for recessions like deficit spending and monetary expansion still worked. True as those words might have been, however, Keynesian economics was not faring well in the court of public opinion, neither among academic economists nor among policymakers. Paul Volcker’s Federal Reserve invoked monetarism, not Keynesianism, in its draconian anti-inflationary policies of the early ’80s, and President Reagan, of course, sold his tax cuts as “supply side” economic policies designed to restore incentives to work and save.
It’s fair to say that nothing really did come along to supplant Keynesian economics on the policy front. Even Reagan’s “supply side” tax cuts had most of their impact through traditional Keynesian channels — putting more money in people’s pockets for them to spend — than by influencing people to supply more labor or save more. The estimated impact on labor supply was meager. The personal saving rate actually fell (graph from Calculated Risk). And President Bush 43’s early 2001 tax rebates worked much the same way — though they weren’t enough to prevent the recession of that year, they did mitigate it. But it’s hard to imagine any Republican politician of the last 30 years announcing, as President Nixon once did, “I am now a Keynesian.” Even Democratic politicians seem less than eager to embrace Keynes.
Fast forward to President Obama’s and Congress’s $787 billion, two-year stimulus package. Republicans have been calling it a failure practically ever since the time the ink on the bill was dry, and the American public seems to be getting increasingly impatient with, if not skeptical of, the stimulus. Unemployment keeps creeping up, after all, most recently to 9.5%. Warnings about the country’s long-term debt problems, to which the stimulus makes some contribution (however overblown in some quarters), have become ever more dire. Andrew Leonard of Salon has a nice little update on the politics and economics of the stimulus, titled “Is the Obama economic rescue plan a failure?”
Leonard, citing Barry Ritholtz of The Big Picture, says the real problem, contrary to Republican critics who say the stimulus is just worthless “spending” as if government purchases weren’t part of GDP (and as if tax cuts weren’t part of the stimulus, too), is not that the food is so bad but that the portions are too small: