“Lord Keynes” provided the most beautiful confirmation possible in the comments of my recent post. Recall that I had teased a guy for simply assuming the Keynesian theory was correct, when interpreting the economic statistics. Lord Keynes upbraided me:
As opposed to your last post, where the data strongly confirms the Keynesian story, but not yours?
If stimulus is counterproductive, then why didn’t real output plunge even further when the stimulus was implemented?
Here’s the chart of total federal expenditures vs. real GDP:
So, the data did exactly what Lord Keynes denied had happened. Yet he literally can’t see this, because he is so sure that extra government spending, other things equal, will boost a depressed economy. He’ll look at that chart and “see” that real GDP was poised to collapse even further, but finally bottomed out (after a lag) because of the Obama stimulus in early 2009.
Also apropos, let’s consider the counterfactuals: The Keynesian economists with their names on the White House analysis of the stimulus package, infamously predicted that the economy without stimulus would have a lower unemployment rate, than what the economy actually ended up getting with stimulus. There could not be a better example of exactly what Lord Keynes had demanded. The economy looked like it was on trajectory A, they implemented the stimulus, and all of a sudden “oh shoot, the economy was worse than we realized.”
(Yes yes, some Keynesians said it wouldn’t be enough. Just like some Austrians and fellow travelers [like Vijay Boyapati and Mish] said deleveraging would lead to tame CPI increases, if not outright price deflation. Yet I don’t see Lord Keynes or Krugman pleading for nuance when discussing the predictions of “the austerian camp” regarding the economy in the last four years.)