The Keynesians are dead … long live the Keynesians
Back in the years between 2008 and 2010 Americans were constantly bombarded by the “S” word, that word being “stimulus.” According to the macroeconomic theory espoused by John Maynard Keyes, during a recession policymakers can stimulate aggregate demand by increasing government expenditures and/or cutting taxes. One or both components of this fiscal policy fix for our nation’s economic ills were followed by George W. Bush and Barack Obama, with both presidents suggesting that millions of jobs would follow, along with the economic prosperity that everyone desperately wanted.
Not only did the country’s fiscal policy managers want to follow the Keynesian prescriptions for curing our economic ills, so did the Federal Reserve via monetary policy actions. While generally thought to be less effective than fiscal policy (according to Keynesians), the low-interest rate policies of the Fed were meant to stimulate the economy by making the cost of borrowing less for both consumers and businesses. Of course, we now know the forecasts for those millions and millions of jobs that were supposed to be created were off the mark by, well, millions and millions.
Apologists for the Keynesian perspective now say that they underestimated how bad the economy was, but that seems to be little more than a rationalization for a poorly performing set of monetary and fiscal policy tools. Even when the Keynesians thought they had finally seen the light at the end of the policy tunnel, the light quickly faded and a sub-par economic performance returned. Do you remember “recovery summer” of 2010? How about 2011? About as quickly as the recovery summers appeared, they disappeared.
So downtrodden were the proponents of Keynesian economics that for the past couple of years, no politicians dared utter the “S” word. At last, it seemed, the simplistic notions of Keynesian economics were finally dead.
But then again, not.
In the past few weeks, despite this most recent evidence that Keynesian theory-inspired fiscal and monetary policy impacts seemed to bear little resemblance to reality, some policymakers are resurrecting these questionable policy guidelines, both in the U.S. and abroad.
Perhaps the most extreme case of Keynesian-amnesia is occurring in Japan where upcoming elections will select that country’s next prime minister. Former PM Shinzo Abe is proposing a huge fiscal stimulus — apparently he does not fear the S-word — with government spending a huge $2.5 trillion on various public works projects. In addition to this fiscal jolt to the recession-bound Japanese economy, Mr. Abe wants to reduce the Bank of Japan’s independence (their version of our Federal Reserve) and advocates an almost mind-boggling monetary stimulus that could well produce negative interest rates as a means of breaking the back of recession and deflation. No doubt about it, this guy’s a turbo-charged Keynesian who might well be taking one of the most heavily-indebted nations in the world and turning it into another Greece-like economy within the international community. Of course, the policies could work, but given the evidence of the past few years, does this seem like a good bet?
Back here at home in the U.S. the fiscal cliff that is fast approaching seems to give fiscal policymakers little opportunity to develop such a high-risk strategy. That does not, however, keep our monetary policy Keynesian-wannabes from shooting themselves (and us) in the foot. By continuing with the potentially never-ending quantitative easing that involves buying various debt instruments over time (of late, mortgage backed securities, but also from time to time, U.S. Treasury securities), the Fed hopes to stimulate spending via rock-bottom interest rates. Is this policy getting to be too much monetary stimulus? A Fed governor recently suggested, no, it is not and the Fed has lots of room to do more of the same as time progresses.
At some point, some might inquire why the Fed continues to follow the same potentially self-destructive path of monetary easing if actual economic outcomes differ tremendously from their own forecasts. Within the past few weeks Americans may have gotten an answer.
According to reported comments from at least one Fed governor, the reason why low interest rates have not worked as advertised is because of baby boomers. Those people born between 1946 and 1964 have not been borrowing and spending as the Fed thinks they should have and so monetary policy effectiveness has been short-circuited.
Not bad policy; bad baby boomers. One has to wonder if a rolled-up newspaper is far behind. Bad baby boomers; bad, bad, bad!
Dr. James Newton serves as Chief Economic Advisor to Commerce National Bank and is an auxiliary faculty member in economics and statistics at OSU-Marion and OSU-Newark. Dr. Newton’s views do not necessarily reflect those of Commerce National Bank or OSU-Marion/Newark.