If you are in any doubt that the direction in economic policy is away from a Keynesian perspective and heading elsewhere, let me draw your attention to a paper that has been put together by the Republican Party Joint Economic Committee in the United States. Here is the conclusion:
The current fiscal condition of the U.S. government is perilous. During fiscal year 2011, the CBO projects that federal spending will be 24.7% of GDP, well above the average of 19.4% of GDP for fiscal years 1947–2007, and will remain far above its post World War II average for the next decade. Moreover, the CBO projects that federal spending will increase to 35.2% of GDP by 2035 in the alternative fiscal scenario under current policies. The United States cannot maintain this level of federal spending—let alone allow it to escalate—without seriously damaging its economy.
The abundant empirical evidence is clear and irrefutable; increasing federal spending as a percentage of GDP will slow economic growth in the long term. Therefore, U.S. policymakers should embark on a fiscal consolidation program based on reducing federal spending as a percentage of GDP.
Keynesians warn that significant federal spending reductions now would weaken the current economic recovery. During the last two decades, however, numerous studies have identified expansionary ‘non-Keynesian’ effects from government spending reductions that offset at least some and possibly all of the contractionary ‘Keynesian’ effects on aggregate demand. In some cases, these ‘non-Keynesian’ effects may be strong enough to make fiscal consolidation programs expansionary in the short term as well the long term.
According to empirical studies, fiscal consolidation programs that (1) eliminate government agencies and programs; (2) cut the number and compensation of government workers; and (3) reduce transfer payments to households and firms have strong expansionary ‘non-Keynesian’ effects. Fiscal consolidation programs that reform government pension and health insurance programs for the elderly to make them sustainably solvent in the long term may also have strong positive ‘non-Keynesian’ factors even if reforms are phased in slowly, do not affect current beneficiaries, and do not significantly reduce outlays in the short term.
Obama Administration officials have emphasized the risk of starting a fiscal consolidation program now while ignoring the risk of delay. There are significant external risk factors to the U.S. economy in both the short run and the long run that cannot be foreseen, such as: (1) resurging price inflation, (2) loss of confidence in the U.S. dollar as the world’s reserve currency, (3) euro-zone sovereign debt defaults, and (4) war in the Middle East. But, the many examples cited in this commentary show that the United States will be in a better position to respond to any of these challenges by reducing federal spending sooner rather than later.
This is a measured very sober empirically-based study that reverses the entire direction of Keynesian-based policy. Whether this is the future of economic theory, it is the present of economic policy. We are looking at a world in which policy has run well ahead of the textbook theories economists now teach. If you have grown up on the C+I+G version of macroeconomics, then what you have learned has with near certainly passed its use-by date.
But as Keynes himself has warned, those vested interests remain entrenched. “There are not many,” he wrote, “who are influenced by new theories after they are twenty-five or thirty years of age, so that the ideas which civil servants and politicians and even agitators apply to current events are not likely to be the newest.” For all that, the problems that have stemmed from the Keynesian policies adopted during the past two years have the power to finally penetrate through to near on everyone that there really is the deepest imaginable problem with the way economies are conventionally understood.