Allan Meltzer vs. Keynesians

Allan Meltzer offers four reasons why Keynesian economics via the Obama stimulus has failed:

First, big increases in spending and government deficits raise the prospect of future tax increases. Many people understand that increased spending must be paid for sooner or later.


Second, most of the government spending programs redistribute income from workers to the unemployed… Permanent tax reduction generates more expansion than increased government spending of the same dollars.


Third, Keynesian models totally ignore the negative effects of the stream of costly new regulations that pour out of the Obama bureaucracy. Who can guess the size of the cost increases required by these programs?


Fourth, U.S. fiscal and monetary policies are mainly directed at getting a near-term result. The estimated cost of new jobs in President Obama’s latest jobs bill is at least $200,000 per job, based on administration estimates of the number of jobs and their cost. How can that appeal to the taxpayers who will pay those costs?

Meltzer concludes:

Clearly, a more effective economic policy would aim at restoring the long-term growth rate by reducing uncertainty and restoring investor and consumer confidence. Here are four proposals to help get us there:

First, Congress and the administration should agree on a 10-year program of government spending cuts to reduce the deficit. The Ryan and Simpson-Bowles budget proposals are a constructive start. (Note to Republican presidential candidates: Permanent tax reduction can only be achieved by reducing government spending.)

Second, reduce corporate tax rates and expense capital investment by closing loopholes.

Third, announce a five-year moratorium on new regulations.

Fourth, adopt an enforceable 0%-2% inflation target to allay fears of future high inflation.

Now that the Keynesian euphoria has again faded, perhaps this administration—or more likely the next—will recognize the reasons for the failure and stop asking for more of the same.

I post this for a two reasons. First, Meltzer is an accomplished economist and deserves to be read, just as Krugman or Stiglitz. Second, and more important, since the collapse of the financial sector and the resulting recession, people have taken an interest in the economics of stimuli. Here Keynes is a clear winner. There are no invisible hand economists in recessions. Or at least, there are no invisible hand politicians in recessions. There is always the urge to do something; to not be seen doing nothing. Since Keynesian economics offers a clear idea of what to do – more stimulus to increase aggregate demand in the short term until normal economic activities can return to pre-recession levels – everyone appears to be a Keynesian. But there are those like Meltzer who are not Keynesian. Next time you hear someone – Joe Biden? – say that “all economists agree,” you will know that they all do not. Keynesianism is a theory, and not the final or even most accepted view.


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