The Dangers of Not Understanding Keynes

The author seems not to understand that the key point of "stimulus" spending is that there is a presumption of a "multiplier" - in other words, Keynesians believe that for every dollar the government spends, there's an amount of activity stimulated equal to a multiple of the government dollars spent.  While the Keynesians believe their research shows a "multiple", the effect has not ever and cannot ever be proved.

In short, they gambled 800 billion on their assumption of a multiplier.

http://www.washingtonpost.com/business/economy/the-dangers-of-being-wrong-on-keynes/2011/07/18/gIQAIuGYMI_story.html

The author, sounding patient and sycophantic in his worship of the oh so wise Keynes, writes:

Keynes — and others who later elaborated on his work, like Hyman Minsky — taught us that although markets are usually self-correcting, they occasionally enter destructive feedback loops in which a shock to, say, the financial system scares business and consumers so badly that they hoard money, which worsens the damage to the system, which further persuades other economic players to hoard, and so on and so forth.  In that situation, the role of the government is to break the cycle. 

This bit of pap may or may not be true, we don't actually know how free market economies work because we've only had small ones in recent times, but it assumes that the Fed and massively influential economy distorting practices by the US government are not to blame for the "destructive feedback loops" such as the one we've seen since 2007 or so.  In short, the present circumstance is at least as likely to be the result of the negative unintended consequences of prior government interventions as it is a cyclical result of a free market's "destructive feedback loops."  In fact, there's simply no reason to believe that our present difficulties are anything but the result of government interventions.

What Keynes taught us is that, when faced with the perception of responsibility for making a depression ravaged economy work, Keynes and most other politicians will happily endorse a model which justifies their choice to spend other people's money "for their own good."  It is political Darwinism at its finest.

The Author's argument is, in effect, "Keynes might have been right."  My dog might have been right, too, and there's equal evidence supporting either theoretician.  I wonder if, were he alive at this juncture, even Keynes wouldn't have realized his theory does not hold water.

The author cites C. Romer's defense of the lack of impact of the 800 billion dollar "stimulus", in which she claims she just underestimated the seriousness of the recession, and the 800 billion dollars wasn't "enough".  Oh, and there's also the problem that we just don't keep enough "shovel ready" programs on hold, waiting for a downturn in the economy, so we can spend our way back out (but we should).

As I read this part, the word nincompoop came to mind.  The author's argument has now become:  "Because Keynes might have been right, we should be ready to spend a much larger amount of money next time on a stimulus - to see if he really was right.  We'll probably know how much money to spend on the stimulus next time, because we missed it so badly this time."

To whom does the author think he is writing?  We didn't all stop learning after our public school education.

Even if the Keynesian multiplier is real, no one "knows" how large it is, and no one knows how much of it will be required to provide an adequate stimulus given that no knows how bad any given recession is, or how long it will last, or ... anything that would amount to more than the pretense of knowledge about how to massage an economy back to health.  The entire Keynesian concept - that an economy is like a football team that just needs a few coaching pointers to perform correctly - is such a joke it's difficult to believe anyone fell for it.

Here's the sad part - there's just no way a politician can do what he/she should - nothing, following the dictum "first do no harm" - when there's a recession on.  The imperative to act is dominating - every President knows they must make it look as thought they know what they are doing, as thought they have the answers, and they must act - even if none of these things are true.  They must act as if they have the fatal conceit even if they are smart enough to know better.