It’s time to enter the inner sanctum of Keynesian theory and see what (little) it’s worth

Calling the Keynesians’ Bluff

By Nathan Smith

As a rule, the latest economic figures are not that important in themselves, but they shed fresh light on long-run trends. It may or may not be true, as Dean Baker suggests, that the 0.1 percent decline in GDP in the fourth quarter of 2012 (according to preliminary Bureau of Economic Analysisestimates) was caused by a decline in government, especially military, spending. But the real question is why the economy is so feeble that it couldn’t take a few defense cuts in stride. The big picture, which the latest data make a little clearer, is the ongoing poor performance of the Obama economy and the Keynesian paradigm that has informed the Obama administration’s economic strategy.

An influential group of Keynesian economists remains undaunted in its advocacy of fiscal stimulus. Paul Krugman, in particular — far from thinking he has anything to apologize for in his full-throated support for stimulus back in 2009 — regularly crows vindication and blames his opponents for not surrendering. Krugman and other Keynesians would say that they continue to be confident because the data support them, but they can only say that because their theoretical prejudices enable them to look at the data in some very odd ways. They wax triumphant over low inflation and low interest rates, which, for theoretical reasons inscrutable to non-economists and debatable by economists, they regard as proof that “aggregate demand” is the problem and stimulus would work, while dismissing as irrelevant the fact that deficit spending at a rate of well over $1 trillion per year since 2009 has left us with anemic growth and 12 million people unemployed, and many more abandoning the labor market in discouragement, while median incomes fell by upwards of 7 percent during Obama’s first term in office.

The political effect of Keynesianism has been to provide a warrant for fiscal irresponsibility. This isn’t necessarily a left/right issue: Keynesianism encourages conservatives to prioritize tax cuts over spending cuts, and liberals to focus on increasing spending more than raising taxes.

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