The Troubling Return of Keynesianism

[Charles_Main]

by Ike Brannon, Former Senior Advisor, U.S. Treasury, and Chris Edwards, Cato Institute

Federal policymakers are moving ahead with a huge $800 billion stimulus plan to return the U.S. economy to growth. Will it work? Decades of macroeconomic research suggest that it won’t. Indeed, the revival of old-fashioned Keynesianism to fight the recession seems to stem more from political expediency than modern economic theory or historical experience.

Conclusions
The current stimulus plan would impose a large debt burden on young Americans, but would do little, if anything, to help the economy grow. Indeed, it could have similar effects as New Deal programs, which Milton Friedman concluded “hampered recovery from the contraction, prolonged and added to unemployment, and set the stage for ever more intrusive and costly government.”10 A precedent will be created with this plan, and policymakers need to decide whether they want to continue mortgaging the future or letting the economy adjust and return to growth by itself, as it has always done in the past.
Unfortunately, President Obama has proposed no long-run fiscal reforms, and like his predecessor seems to have a short-run Keynesian outlook. The tax cuts of 2001 and 2003 were generally sold as temporary stimulus measures, and President Bush hailed the 2008 tax rebates as providing a “booster shot” for the economy.11 It is not clear whether Keynesian beliefs or political factors are the main driver for the $800 billion stimulus plan. But as Harvard University’s Robert Barro noted in disapproval of the stimulus plan, just because the economy is in crisis, it does “not invalidate everything we have learned about macroeconomics since 1936.

Read he full article here http://www.cato.org/pubs/tbb/tbb_0109-52.pdf