The Troubling Return of Keynesianism

USA TODAY, April 2009 | Go to article overview

The Troubling Return of Keynesianism


DECADES of macroeconomic research suggests that the Federal government's stimulus plan to return the U.S. economy to growth will not work. 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, maintain Ira Brannon, former senior advisor to the Treasury, and Chris Edwards, director of Tax Policy Studies at the Cato Institute, Washington, D.C., in Cato's Tax & Budget Bulletin.

The idea of using fiscal policy to boost the economy during a downturn was championed by John Maynard Keynes in the 1930s. He argued that market economies can get stuck in a deep rut and that only large infusions of government stimulus can revive growth. Keynes posited that high unemployment in the Great Depression was due to "sticky wages" and other market difficulties that prevented the return of full-employment equilibrium. Interestingly, point out Brannon and Edwards, Keynes did not offer any evidence that sticky wages were a serious problem, and later research indicated that wages actually fell substantially during the 1930s. Instead, one needs to look at a range of government interventions to explain why the downturn lasted so long.

Despite the flaws in Keynes' analysis, his prescription of fiscal stimulus to increase aggregate demand during recessions became widely accepted. Governments came to believe that--by manipulating spending or temporary tax breaks--they could manage the economy scientifically and smooth out business cycles. Many economists thought that there was a trade-off between inflation and unemployment that could be exploited by skilled policymakers. If unemployment was rising, the government could stimulate aggregate demand to reduce it, but with the side effect of somewhat higher inflation.

[ILLUSTRATION OMITTED]

The dominance of Keynesianism ended in the 1970s. Government spending and deficits ballooned, but the result was higher inflation, not lower unemployment. These events, and the rise of monetarism led by Milton Fried-man, ended the belief in an unemployment-inflation trade-off, Keynesianism was flawed and its prescription of active fiscal intervention was misguided. Indeed, Friedman's research showed that the Great Depression was caused by a failure of government monetary policy, not that of private markets, as Keynes had claimed.

Even if a government stimulus were a good idea today, policymakers probably would not implement it the way Keynesian theory would suggest, Brannon and Edwards reason. To fix a downturn, policymakers would need to recognize the problem early and then enact a countercyclical strategy quickly and efficiently However, U.S. history reveals that past stimulus actions have been too ill-timed or ill-suited actually to have helped. Further, many policymakers are driven by motives at odds with the Keynesian assumption that they will pursue the public interest diligently.

The end of simplistic Keynesianism created a void in macroeconomics that was filled by the "rational expectations" theory developed by John Muth, Robert Lucas, Thomas Sargent, Robert Barro, and others.

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

The Troubling Return of Keynesianism
Settings

Settings

Typeface
Text size Smaller Larger
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Full screen

matching results for page

Cited passage

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited passage

Welcome to the new Questia Reader

The Questia Reader has been updated to provide you with an even better online reading experience.  It is now 100% Responsive, which means you can read our books and articles on any sized device you wish.  All of your favorite tools like notes, highlights, and citations are still here, but the way you select text has been updated to be easier to use, especially on touchscreen devices.  Here's how:

1. Click or tap the first word you want to select.
2. Click or tap the last word you want to select.

OK, got it!

Thanks for trying Questia!

Please continue trying out our research tools, but please note, full functionality is available only to our active members.

Your work will be lost once you leave this Web page.

For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

Already a member? Log in now.