Saturday, December 12, 2009

Is Keynesian Stimulus the Best Approach?

Greg Mankiw tackles Keynes, and the Obama administration's fiscal policy:

When devising its fiscal package, the Obama administration relied on conventional economic models based in part on ideas of John Maynard Keynes. Keynesian theory says that government spending is more potent than tax policy for jump-starting a stalled economy.

The report in January put numbers to this conclusion. It says that an extra dollar of government spending raises G.D.P. by $1.57, while a dollar of tax cuts raises G.D.P. by only 99 cents. The implication is that if we are going to increase the budget deficit to promote growth and jobs, it is better to spend more than tax less.

But various recent studies suggest that conventional wisdom is backward.

. . .

Like [a] doctor facing a mysterious illness, economists should remain humble and
open-minded when considering how best to fix an ailing economy. A growing body of evidence suggests that traditional Keynesian nostrums might not
be the best medicine.

I await Paul Krugman's response.

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