Austerity, Alesina, John Quiggin and me

I started with what turned out to be the wrong assumption about John Quiggin’s use of the term “zombie”. From the following I could only think it was intended to mean something of unparalleled and unusual excellence, as in the following passage:

Yesterday’s Fin ran a piece from Stephen Kirchner and Robert Carling of the Centre for Independent Studies, under the headline ‘Give austerity a chance’ which was a pretty accurate summary of the contents…. The piece relies almost exclusively on the work of Alberto Alesina and his colleagues, promoting the zombie idea of expansionary austerity.

But on further reading, I have reluctantly had to conclude that he uses “zombie” as a negative. He thinks, apparently, that “expansionary austerity” is a contradiction in terms, and like a true blue Keynesian believes, based on the models he learned when he was young and impressionable, that cutting spending and balancing budgets are bad for an economy. This, in spite of the fact that on the two occasions we balanced budgets in this economy during the past quarter century, once by Paul Keating in 1988 and the second time by Peter Costello in 1996-97, the results were a stunning acceleration of economic growth. Funny, in a peculiar kind of way, that when Keating did it, within a year he was worrying about the economy overheating, and when Costello did it, we passed through the Asian Financial Crisis with hardly a blip on the screen.

Now I realise we have gone through this referencing of Quiggin’s discussion of Alesina’s work already on this site – here and here. But as I am heading off to a conference at the end of next week where I will be speaking with Alesina and about him, I have been doing quite a bit of research. And even though Quiggin thinks Alesina’s  research is “the most-refuted piece of economic analysis put out in recent decades”, I cannot see how that can be, given our own experience here in Australia.

Alesina, you see, has discovered that if you try to balance your budget by raising taxes it may not work at all, and worse still, that whatever success it may have, higher taxation does not work as well as cutting spending. I’m not even sure he expected to find what he found, but he did the empirical research and found these results. Cutting public spending is “associated with” – as academics like to put it – with an upturn in the economy. That every Keynesian hysteric has since then run round with a meat axe to try to refute these results proves nothing other than it must be extremely annoying to have to learn about Say’s Law again, just like our ancestral economists had to do a century ago.

The reason I now know that “Zombie Economics” is meant to be a bad thing is because I consulted Quiggin’s new book which has that very title. Catchy. Next time I write a book I may come to him for a title, but not necessarily for much else. Say’s Law, for example, at least according to Quiggin, “states in essence that recessions are impossible”. Does he really think that for a couple of centuries until Keynes came along economists had argued and believed that recessions could not happen even though they would take place every ten or so years, often devastating whole economies for years on end? Now if he really thinks that, there is a zombie belief if ever I heard one.

Then when he discusses Say’s Law, he writes that it had been “misleadingly” attributed to J.-B. Say (1762-1834) although “developed by later economists such as James Mill” (1773-1836). Eleven years is hardly a difference as these things go. And as it happens Say and James Mill jointly developed the fundamental concepts over the period 1803-1825, each feeding off what the other had written. I can only hope Quiggin wasn’t confusing James with his son John Stuart (1806-73) who wrote the final polished classical version of Say’s Law in 1848.

A year ago I would have said that Keynesian economics was dead beyond revival. There was no way such obviously wrong ideas could survive the irrefutable evidence of such massive failure. Everywhere policy makers are going in the other direction irrespective of the nature of the economy. Even here in Australia, the Government feels compelled to pretend that it is going to balance its budget in 2012-13 and would do so if it could. This is so even with just about every part of the economy but the mining sector struggling. Someone therefore needs to find a word to use about economic theories that have been refuted beyond question but which economists still continue to apply, because that is the word, I’m afraid, that needs to be used about Keynesian economics. Keynesian theory remains in all the texts - with the sole exception of mine, of course - but for all practical purposes is dead as a dodo.

Because here is how it is. Whatever economists might tell them, policy makers will pay them little attention if they continue to argue that public spending needs to be maintained and more debt is the answer to recession. That is why Alesina’s results are so interesting. Unintuitive for a Keynesian economist no doubt, but of immense importance if strong economies are the aim.

John Quiggin Replies and I respond: It was nice of John to respond which is how knowledge is supposed to move forward. Of my post, here is how he walks away from what I wrote, saying only this in direct reply as if all I wanted to do was:

quibble about the chronological relationship [in the development of Say's Law] between Jean-Baptiste Say and the Mills, father and son.

This does not at all capture what I was trying to get at. But at least he concedes that he did not get right the story about how Say’s Law developed. But that wasn’t what I was really writing about. Nor is it my ambition to defend Alesina chapter and verse since there are by nature deficiencies in all such studies, not least because the data are generally designed for Keynesian models and not for other kinds of analysis. But if Alesina has been able to demonstrate in a series of cross-country studies that increased public spending is not beneficial for long-term growth, he seems to be onto something. 

I don’t even really wish to get into a discussion about what happened to Australia after Keating balanced the budget in 1988 but somehow John’s take appears to me deficient so far as the actual circumstances of the subsequent recession are concerned. He writes:

The severe recession that began just after the triumphant return to budget surplus (when Paul Keating went from bragging that ‘this is the one that brings home the bacon’ to observing that ‘this is the recession we had to have’) wiped out all of the fiscal consolidation of the previous decade – balance wasn’t restored until years into the expansion with a consolidation that produced an increase (admittedly temporary) in unemployment, as Keynesian theory would predict.

To omit the decision to raise interest rates to 20% during 1990-92 somehow leaves out what was the most important part. The economy boomed and then the Labor Government refused to accept things really were going well and did all they could to slow things down. Is that part of what Keynesian theory would predict?

Nor does John mention of the Costello recovery after 1996 which came on the tail of a downturn brought on by high interest rates again in 1994-95. Balanced budget and cuts to spending were associated with a robust recovery. Alesina’s views on things seem dead on about that episode, which he unfortunately never discussed.

But to really get to my point, Keynesian economics has been tried during the most recent stimulus and it has failed. There has been the grand experiment worldwide from which, it seems, no Keynesian is capable of reaching any conclusion other than they were proven right. Where they find evidence fo this is a mystery, but they have declared themselves the winners and still champions even as policy makers have begun to reverse every stimulus program in the world.

Had our economies raced out of recession and unemployment fallen like a rock, there can be no doubt that Keynesians across the world would have had their trumpets out and we would never have heard the end of it. And they would have been vindicated. But that is not what happened. There have been no recoveries anywhere from what was really a minor tempest in credit markets that was over within six months. The recession we now have has been caused by the stimulus and not the credit squeeze. It is debt and not the banking system that is the problem.

Keynesian economics is an absolutely rotten guide to policy. If John would like to understand why, he could do worse than reading James Mill and J.-B. Say to find out what it was they said.

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38 Responses to Austerity, Alesina, John Quiggin and me

  1. JC

    I really don’t understand the near absolute hostility towards Says law from the left.

    Even if in the modern day of demand management there is nothing at all wrong to suggest Says Law has tautological meaning in that demand = supply (and therefore supply = demand).

    It would also give more credence and authority when talking about supply side reforms and why they are so important.

  2. Max Scream

    What has fiscal consolidation in time of economic expansion, which is what is referred to in your links, got to do with times of economic contraction?

  3. JC

    Maxwell

    Stay off this thread. Make your lunatic, bolivating, incoherent statements elsewhere please.

    Thanks in advance.

  4. John Comnenus

    I thought a zombie had a slow, rigid moving body that is almost unstoppable with no brain of it’s own but lives by devouring the brains of others.

    Therefore zombie economics perfectly defines Keynesianism or

    Someone therefore needs to find a word to use about economic theories that have been refuted beyond question but which economists still continue to apply, because that is the word, I’m afraid, that needs to be used about Keynesian economics.

  5. .

    The left is full of zombie economics which assumes we cannot lower our expenditure.

    Welfare could be cut be at least $85-90 bn with no one who is poor worse off (See Peter Saunders of the CIS and well as John Humphreys of the CIS and LNP, formerly of the LDP…). In fact many would be better off.

    I find it hard to take their claims of good economic management and governing for all seriously.

    We could cut Government expenditure by at least 6.5%. Yet many big time left wing academics insist that we can’t without a drop in living standards and that we should spend more – even though we have uneconomic, off balance sheet items like the NBN already.

    Don’t worry Steve – Keynes is unpopular with the public. We just need to get it out of the universities.

    If only universities could make students ask why the slump happened in the first place, and what the general effectiveness of fiscal stimulus was, than this would be an easy fight to win.

  6. alan moran

    If the Alesina interpretation is confirmed it means the debate between different economic schools is largely irrelevant. It means the Keynesian stimulus effect has merely been misinterpreted by earlier empiricists who have confused a short term jolt with a longer term neutral (or, actually, lowering of GDP). This too will be reinterpreted within the C-I-G formula.

    Hopefully though, it will divert attention back to the minimalist government as the only way that increased wealth can be created. It may also lead to the dethronement of macro-economists, who increasingly are writing learned tracts merely for their own priesthood and providing cover for the policies that governments want to follow anyway. Thus, Quiggin as well as participating in the debate on an academic level espouses mineral taxes and carbon taxes and any other taxes that proclaim as harmless a milking of the productive sectors of the economy. Such notions of painlessly providing funds for government disbursement are music to many a politician’s ears.

    Indeed in the yet to be published book of Farrell and Quiggin, Krugman, the god of stimulatory promotion, is quoted as saying,

    “if your view about policy is mostly that the government shouldn’t do it, it’s possible to write two articles a month saying that, and if you are Milton Friedman you can carry it off and get a large audience, but … it’s harder than it is to be weighing in on stuff the government should be doing.”

    In other words, you report that what we need now is masterly inactivity and nobody will publish. By contrast, there are numerous ways of saying ‘we’ll all be ruined unless we take action’ which make interesting, even if inaccurate, news.

  7. Peter Patton

    The ‘zombie’ meme has been a common one among socialists for years now. Perhaps they need to look into a mirror to see the real zombies.

    http://www.amazon.co.uk/Zombie-Capitalism-Chris-Harman/dp/1905192533

  8. brc

    I prefer the definition of a zombie in economic terms to be a public-funded institution or rent-seeking corporate who doesn’t produce or provide anything of value, but just sucks on the funds of the living taxpayers.

    My current bete noire of desalination plants are the perfect example of an economic zombie. Just sitting there, eating taxpayer money and producing nothing.

    The same description fits many Federal departments perfectly. Dept of Health – 6,000 staff, none of whom actually see any patients. Dept of Climate Change- not sure of the budget – cannot, by definition, change the climate (why not have a Dept of Tide Stopping?).

    For anyone who wants an entertaining re-introduction to Says Law, I recommend the book ‘Waffle Street’. It does a good job of lightheartedly skewering the Keynesian straw man Says Law of ‘production creates it’s own demand’ and re-iterating the original ‘there is no demand without production’.

    In other words, I can’t ask for (demand) something from you until I produce something you want.

    Very hard for the average Keynesian leftie to get their head around, because it actually involves producing something.

  9. Jim Rose

    Quiggin over-reached himself by saying that it is “the most-refuted piece of economic analysis put out in recent decades”. made it a lot easier to counter-punch without having to addresss the real issues.

    Quiggin also claims that he had read ‘Tales of Fiscal Adjustment’ by Alesina and Ardagna, ‘which appears to be the founding text for the idea of expansionary austerity.’ The “Treasury view” of fiscal policy in the 1930s is another founder.

    The use of fiscal consolidations to end hyper-inflation is another founder as per tom sargent’s 1986 book on the end of big inflations.

    the literature on an unpleasant monetary arithmetic is another founder as is the ricardian theory of fiscal policy.

  10. On your Marx

    How ironic that Steve Kates praises both Paul Keating and then Peter Costello when balancing their budgets.

    They were simply implementing KEYNESIAN policy.

    If Steve and others had bothered to actually try and find out then they would know Keynesian economics is not about deficit spending all the time.
    It is about maintaining larger surpluses in times of ‘boom’ and is much tougher fiscally than classical economics.

    Indeed it is only when monetary policy either
    doesn’t work or isn’t working very well is a fiscal.
    stimulus contemplated.

    There are a lot of criticisms of A&A’s work.

    A couple are:
    There is a lot of omitted variable bias in their work. A lot of fiscal consolidations were not deliberate at all. Stock prices were omitted. In a time of rising stock prices, tax revenues rose which in itself reduced the CAB.
    This omitted variable made it look as though deficit reduction was expansionary when it wasn’t.

    Policymakers tend to stop fiscal consolidation that are followed by ouput declines whereas they continue those when output increases.So the only consolidations that show up in the budget data are the ones followed by growth.

    the IMF found the contractionary effects of fiscal consolidations were often offset by other policy actions such as lower interest rates and depreciating exchange rate (as Keynes would have predicted)
    Ireland had had THREE fiscal consolidations but only ONE succeeded.Interest rates were cut significantly and a large devaluation helped by a booming UK economy (their largest trading partner)led to net exports rising significantly.

    Also in the A&A study a country succeeded in fiscal consolidation by only being better than most other countries in the OECD. It could have negative growth but if it was lower negative growth than other countries then hey presto fiscal consolidation succeeded.

    Perrotti, one of Alesina’s former co-writers, actually found out in a BIS paper that examining four countries from the IMF study ( the one that demolished A&A), that all four used a lot more tax increases than spending cuts in reducing their budget deficits. This is at odds with A&A.

  11. JC

    If Steve and others had bothered to actually try and find out then they would know Keynesian economics is not about deficit spending all the time.

    Oh, Last quarter US GDP was 3%. The deficit is 9%. Aren’t they supposed to be running a surplus now?

    Aisle 8 please.

  12. sean

    Must be those crappy christmas tunes they play ad nauseum. It’s really messed with him and the rest of the mob in the Woolies shelf stackers union.

  13. .

    There is a lot of omitted variable bias in their work. A lot of fiscal consolidations were not deliberate at all.

    Here the penny would drop for anyone NOT on a Government sinecure.

  14. On your Marx

    actually Annual GDP growth was 2.6% not 3% that is merely the quarter annualised. There is a large difference between the two measures.

    and no you wouldn’t have a surplus given there is a very large output gap and it would need to narrow substantially before a surplus was contemplated.

    This is always the problem who lack understnding of fiscal policy.

    They make the same facile and inaccurate remarks.

  15. jtfsoon

    I knew that software Homes was using was too good to be true. He’s mangling English again

  16. .

    actually Annual GDP growth was 2.6% not 3% that is merely the quarter annualised.

    No shit?

    Last quarter US GDP was 3%.

    Fuck you’re hopeless, correcting errors that don’t exist.

    You really are an embarrassment to the Australian tertiary sector.

  17. Pingback: John Quiggin » Alesina, Ardagna, Austerity, Australia

  18. Jim Rose

    btw, a better way to attack Alesina is his weak, at a minimum, terse theoretical structure behind why fiscal contractions might be expansionary. Many who mention his work have to improve on his scant theoretical analysis.

    His argument is that the fiscal consolidation is a credible signal of a long-run reduction in taxes and higher after-tax incomes and higher and more certian after-tax returns on working, saving and investing and that government debt will not be monetarised.

  19. On your Marx

    Over the last four quarters the annual growth rate in the US has been 2.2%, 1.6%, 1.5% and finally 1.6%.

    There has been only 8 quarters where Growth has been positive and fiscal ignorami wish there to be a surplus.

    You neither expand nor contract too quickly.

    If you contract too quickly you could easily put the economy into recession.

    I see people do not understand the difference between an annualised figure and an annual figure.

    I blame the schools for this elementary errors

  20. jtfsoon

    Homer
    If the supply side wasn’t constrained by your Labor mates, why wouldn’t you want to ‘expand’ too quickly?

    Is Sussex St still feeding you well?

  21. JC

    Over the last four quarters the annual growth rate in the US has been 2.2%, 1.6%, 1.5% and finally 1.6%.

    Your numbers are incorrect, numbnuts. Last quarter’s was 3% annualized for a start.

    There has been only 8 quarters where Growth has been positive and fiscal ignorami wish there to be a surplus.

    Which in your brain stem suggests they should be running a deficit of 9%?

    You neither expand nor contract too quickly.

    So a 9% expansion isn’t too big nor too quick in your brain stem? And also no need to close it down?

    You idiotic stacker.

    If you contract too quickly you could easily put the economy into recession.

    No you don’t if the Fed expands the balance sheet enough.

    I see people do not understand the difference between an annualised figure and an annual figure.

    They grew at 2.2% last year you appalling oaf and the deficit was still at 9%. It’s unjustifiable by any measure and certainly unjustifiable according to your appalling Keynesian standards.

    I blame the schools for this elementary errors

    I blame Macquarie for giving you false hope. Think how many years you lost when you could have easily been stacking shelves, which is a career path you’re more suited to.

  22. .

    I am foaming at the mouth at this bucket jawed, feckless, possibly inbred, moron PAXTON’s insistence that everyone else was using a year to date figure and not an annualised one…WHICH IS OBVIOUSLY FUCKING UNTRUE. Homer you monumentally and collossally brain damaged fuckwit you have done this to me before when you were losing a debate.

    You truly are a reason to abolish Macquarie University, raze it to the ground and salt the 126 ha it sits on with radioactive fallout.

    Your mind is the forbidden zone of politics and economics.

  23. jtfsoon

    tell us how you really feel, dot.

    just let it all out.

  24. JC

    And don’t hold back.

    jase, it’s tough but also very fair I think.

    Homes, you’re wanted at the fresh food counter. They want you to carry a slab of beef to the counter as they ran out. Put your cooks hat on too as they don’t want any of your hair on it like last time. Recall?

  25. JC

    If there’s a bucket of innards , bring that out with the other hand. Someone’s asking for kidneys.

  26. Jim Rose

    Happened to read Quiggin’s ‘Expansionary Austerity: Some shoddy Scholarship’ at another blog other than his own. He nit-picks errors about Australian economic history in the 1980s and the year of the election in the 1983 then make some of his own.

    He attributes Labour’s 1996 ‘thumping defeat, based primarily on the recession of the early 1990s’. Quiggin did not note that there was an election in 1993 that provided a more opportune vent for electorate over the 1991 Keating recession.

    The re-election of Labour in 1993 actually confirms Alesina’s point that fiscal adjustments do not increase the likelihood of electoral defeat for incumbents

    Quiggin then goes on the paint the 1980s and 1990 in a rather Keynesian hue. Did not know that him, Hawke, Keating and Fraser were all brothers of the book.

    Quiggin even says that ‘the description of Australian macroeconomic experience given here is unrecognisable to someone who lived through the period. The government did lots of things that gained the approval of neoliberals (global sense) but these were almost entirely microeconomic in nature.’

    Microeconomic! Quiggin forgot the 18% mortgage rates, the recession we had to have, the current account fetish and the long struggle to introduce inflation targeting.

  27. John Quiggin

    “Quiggin forgot the 18% mortgage rates, the recession we had to have, the current account fetish and the long struggle to introduce inflation targeting.”

    I shouldn’t bother, but Jim Rose is totally wrong as usual. From the post

    “Writing in 1998, Alesina and Ardagna must surely have been aware that, almost immediately after their story ends, Australia entered the worst recession in its postwar history. The recession was triggered by contractionary monetary policy,”

    For those of limited comprehension, contractionary monetary policy = 18 per cent interest rates.

    “Paul Keating went from bragging that “this is the one that brings home the bacon” to observing that “this is the recession we had to have””

    “this depreciation, and the current account deficits that drove it led to Treasurer Paul Keating’s famous observation that Australia was in danger of becoming a “banana republic”’

    I didn’t discuss inflation targeting because it didn’t come in until the 1990s.

  28. PSC

    To omit the decision to raise interest rates to 20% during 1990-92 somehow leaves out what was the most important part.

    Microeconomic! Quiggin forgot the 18% mortgage rates, the recession we had to have, the current account fetish and the long struggle to introduce inflation targeting.

    Ummm – the whole point of the 17% cash rates in 1990 were the same as in the US in the early 80s – to get pernicious 7-10% inflation under control. And it worked. It took about 2 years, just like it took Volcker 2 years in the US in the early 80s.

    Maybe Keating should have done it sooner, say in the mid 80s not long after floating the dollar.

    I’m not sure if this is your argument? If so, fair enough.

    Are you arguing instead we should have lived with high inflation? I guess that’s an original and different argument to hear from a conservative.

  29. sdfc

    The labour market shakeout and the move to a lower inflation economy made the recession of the early 90s a watershed in the nation’s economic history.

  30. .

    I can’t believe you guys bring up contractionary monetary policy and 7-10% inflation without discussing what caused it.

    Talk about zombie economics. Maybe just brain dead and innumerate.

  31. sdfc

    Australia had been a high inflation economy for most of the previous twenty years Dot.

  32. .

    It was workers, investment, foreign investment, the CAD, imports, exports, the lack thereof or greedy businesses – but never monetary or fiscal policy?

    The socialist monetary theory is fucking hilarious.

  33. sdfc

    Are you a complete goldfish or what. Your comment doesn’t seem to have a point considering my well known position on loose monetary and fiscal policy and inflation.

  34. .

    No no no I’m keeping you honest.

  35. sdfc

    My position has never changed on the ultimate cause of persistent inflation.

  36. Jim Rose

    thanks John for your fast reply.

    Those nits may have been worth picking, but your picking of them illustrates your propensity to believe that people who disagree with you are totally wrong rather than have a different interpretation of the facts and economic processes at work.

    Substantive points of disagreement you have not answered were, for example:
    • Attributing Labour’s 1996 ‘thumping defeat to the recession of the early 1990s, and not noting that there was an election in 1993 that provided a vent for electorate over the 1991 Keating recession.

    • The re-election of Labour in 1993 with an increased majority confirms Alesina’s point that fiscal adjustments do not increase the likelihood of electoral defeat for incumbents

    Most of all, you say that

    ‘The government did lots of things that gained the approval of neoliberals (global sense) but these were almost entirely microeconomic in nature’

    You may not interpret the slow evolution of monetary policy in the 1980s and in the 1990s as part of whatever so called neoliberalism did for Australia, but I do and this pain-staking policy transformation was a central part of that evolution and to the spreading of the great moderation to Australia.

    See Edward Nelson, 2005. “Monetary Policy Neglect and the Great Inflation in Canada, Australia, and New Zealand,” International Journal of Central Banking, vol. 1(1), May:

    • Nelson studies newspaper coverage and policymakers’ statements are used to analyze the views on the inflation process that led to the 1970s macroeconomic policies, and the different movement in each country away from 1970s views.

    • He argues that to understand the course of policy in each country, it is crucial to use the monetary policy neglect hypothesis, which claims that the Great Inflation occurred because policymakers delegated inflation control to nonmonetary devices.

    • This hypothesis helps explain why, unlike Canada, Australia and New Zealand continued to suffer high inflation in the mid-1980s. The delayed disinflation in these countries reflected the continuing importance of nonmonetary views of inflation.

    The replacement of a non-monetary views of inflation with a monetary view of inflation by the early 1990s is a big win for Friedman, if you ask me.

  37. Steve Kates

    John either chooses to ignore my addendum to the initial post or let us assume he did not see it. So let me repeat it here, with the main point being that we can argue till the cows come home about 1987 and 1996, but it is the failure of the stimulus which is the albatross hanging round the head of Keynesian theory. Anyway, this was the addendum, which merely shows that Alesina is certainly right about public spending having brought no recovery, which is the obverse of saying that cuts to spending would actually allow one to occur. Anyway, this was that addedum:

    John Quiggin Replies and I respond: It was nice of John to respond which is how knowledge is supposed to move forward. Of my post, here is how he walks away from what I wrote, saying only this in direct reply as if all I wanted to do was:

    quibble about the chronological relationship [in the development of Say's Law] between Jean-Baptiste Say and the Mills, father and son.

    This does not at all capture what I was trying to get at. But at least he concedes that he did not get right the story about how Say’s Law developed. But that wasn’t what I was really writing about. Nor is it my ambition to defend Alesina chapter and verse since there are by nature deficiencies in all such studies, not least because the data are generally designed for Keynesian models and not for other kinds of analysis. But if Alesina has been able to demonstrate in a series of cross-country studies that increased public spending is not beneficial for long-term growth, he seems to be onto something.

    I don’t even really wish to get into a discussion about what happened to Australia after Keating balanced the budget in 1988 but somehow John’s take appears to me deficient so far as the actual circumstances of the subsequent recession are concerned. He writes:

    The severe recession that began just after the triumphant return to budget surplus (when Paul Keating went from bragging that ‘this is the one that brings home the bacon’ to observing that ‘this is the recession we had to have’) wiped out all of the fiscal consolidation of the previous decade – balance wasn’t restored until years into the expansion with a consolidation that produced an increase (admittedly temporary) in unemployment, as Keynesian theory would predict.

    To omit the decision to raise interest rates to 20% during 1990-92 somehow leaves out what was the most important part. The economy boomed and then the Labor Government refused to accept things really were going well and did all they could to slow things down. Is that part of what Keynesian theory would predict?

    Nor does John mention of the Costello recovery after 1996 which came on the tail of a downturn brought on by high interest rates again in 1994-95. Balanced budget and cuts to spending were associated with a robust recovery. Alesina’s views on things seem dead on about that episode, which he unfortunately never discussed.

    But to really get to my point, Keynesian economics has been tried during the most recent stimulus and it has failed. There has been the grand experiment worldwide from which, it seems, no Keynesian is capable of reaching any conclusion other than they were proven right. Where they find evidence fo this is a mystery, but they have declared themselves the winners and still champions even as policy makers have begun to reverse every stimulus program in the world.

    Had our economies raced out of recession and unemployment fallen like a rock, there can be no doubt that Keynesians across the world would have had their trumpets out and we would never have heard the end of it. And they would have been vindicated. But that is not what happened. There have been no recoveries anywhere from what was really a minor tempest in credit markets that was over within six months. The recession we now have has been caused by the stimulus and not the credit squeeze. It is debt and not the banking system that is the problem.

    Keynesian economics is an absolutely rotten guide to policy. If John would like to understand why, he could do worse than reading James Mill and J.-B. Say to find out what it was they said.

  38. On your Marx

    the BEA have in constant prices the 20010 Q4 GDP figures at 13216.1.
    In 2001 Q4 it is 13429.9.

    Which gives an annual rise of ….?

    no-one who understands statistics would attempt to use an annualised one quarter figure as giving an accurate guide to US GDP growth.

    Steve is dissembling as usual.

    both Keating and Costello used traditional Keynesian theory to get out of their troubles which was a largish fiscal deficit when it should have been a surplus.

    Costello certainly didn’t inherit a downturn that occurred in 2001.

    no Keynesian policy didn’t fail and Steve hasn’t produced a scintilla of evidence it did.

    This could well be another example like the false 10 fiscal stimuli of Japan in the 1990′s.

    Indeed the great failure of fiscal policy came in the three years before 2007 when the government adopted a form of classical economics and gave us rising inflation.

    That is what happens when you patently do not understand fiscal policy.

    Europe has shown everyone how false classical economics is by making budgets worse not better.

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