The (political) failure of Keynesianism
Interesting post by Alex Tabarrok arguing that Keynesian politics -- as distinct from Keynesian policies -- has failed pretty much whenever it's been tried, at least in liberal democracies. Keynesianism might be good economics, but persuading people that the right response to a recession caused by overspending and running up debt is for the government should start spending heavily and running up debt is a bit like trying to persuade an ailing smoker that the answer is cigars. People don't buy it.
What's been more successful are so-called "automatic stabilizers": Programs that spend more during recessions -- that is to say, that have a Keynesian effect -- without Congress specifically passing a new law demanding they do so. Unemployment insurance sends a lot more money into the economy during periods of 10 percent unemployment than 6 percent unemployment. So does Medicaid. The health-care reform bill will have a similar effect, as its subsidies will reach more people when more people lose their jobs. And all this happens automatically. You don't have to hand out copies of “The General Theory of Employment, Interest, and Money” in the Senate.
But one lesson from this recession is those policies should be made much more automatic. Unemployment insurance is built for mild recessions at best. Congress had to keep extending the length of benefits to deal with the long periods of joblessness people in the economy were -- and are -- undergoing. There's no reason that can't be made automatic in the future: If unemployment rises beyond 8 percent in a state, then unemployment insurance in that state becomes instantly more robust. Somewhat similarly, Medicaid should become fully federal: It's funded by a federal-state partnership, and the states find it a crushing burden during recessions -- they're least able to spend more on Medicaid at the exact moment their people need it most.
I also think a future administration looking back at this period will likely consider the stimulus a huge political mistake. The spending -- though arguably quite effective -- was completely invisible. The major tax cuts in the bill, in fact, were designed specifically so they wouldn't be noticed. You may or may not believe a payroll tax holiday would've created as many jobs, but it definitely would've been more appreciated.
In the future, I expect stimulus to take the guise of clear and highly publicized tax cuts much more often than spending projects, even though a lot of the evidence we have suggests spending projects carry more benefits than most types of tax cuts. The only caveat to this is that if the economy recovers over the next two years, Obama is reelected, and he retires a successful president, then the projects the stimulus funded -- electronic health records, roads, rail, weatherization, green-energy funding, Race to the Top, etc. -- may take on a WPA-like glow and the Obama stimulus might come to be lauded by liberals as a moment of historic policy achievement, an example of not letting a crisis go to waste. In that case, future administrations may be more willing to give it another shot, though with some political tweaks.
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