Keynes testing

NPR/PRI has some great stories on the return of Keynes theories, and possibly the very first test of them.  This American Life:

373: The New Boss – Stories about what happens when someone new takes over—someone with a vision of how things ought to be. Plus, NPR international economics correspondent Adam Davidson of the Planet Money podcast on how Obama’s new stimulus plan might actually be the first ever test of a very, very old theory.

NPR Planet Money:

Obama Tests Keynes – President Barack Obama says that only government can pull America out of a recession this severe. Obama calls his plan for stimulus spending of well more than $800 million a new idea, but Adam Davidson and Alex Blumberg say this kind of public spending relies on an old theory. John Maynard Keynes wrote it up in 1936 — and this recession marks its first real-world test.

The WSJ ran an oped from Dick Armey that was critical of the Keynes-like plans. Though I don’t agree with his suggestions (tax breaks), the article does a decent job of outlining the issues issues being ignored by current plans – Washington Could Use Less Keynes and More Hayek:

Government spending is, according to Keynes’s construct, a key component in determining aggregate demand, so more spending, even to resod the Capitol Mall or distribute free contraception, drives the economy in the short run. A father of public choice economics, Nobel laureate James Buchanan, argues that the great flaw in Keynesianism is that it ignores the obvious, self-interested incentives of government actors implementing fiscal policy and creates intellectual cover for what would otherwise be viewed as self-serving and irresponsible behavior by politicians. It is also very difficult to turn off the spigot in better economic times, and Keynes blithely ignored the long-term effects of financing an expanded deficit.

This is one thing that Keynes theory didn’t address – what happens when the govt is always spending and stimulating? We haven’t exactly been saving for a rainy day in good times; since Regan we have been borrowing against our social security and medicare.  Keynes theory was created in a very different time:

Today, one problem with manipulating the economy through “discretionary” spending — that part of the budget not mandated by one entitlement or another — is that entitlements have grown large enough to influence the economy, a phenomenon unheard of when Keynes was alive. Medicaid, Medicare, Social Security and other entitlements are becoming larger factors in economic decision making than what Congress spends on, say, roads. Discretionary spending is becoming irrelevant as a fiscal tool.

If the engine is flooded, do you keep mashing the gas pedal?