Slouching towards stimulus

Peter Boettke has a short post on political parties, where he quotes Luigi Zingales from the start of the Great Recession:

If Keynesian principles and education are the cause of the current depression, it is hard to imagine they can be the solution. Keynesianism has conquered the hearts and minds of politicians and ordinary people alike because it provides a theoretical justification for irresponsible behaviour. Medical science has established that one or two glasses of wine per day are good for your long-term health, but no doctor would recommend a recovering alcoholic to follow this prescription.

Unfortunately, Keynesian economists do exactly this. They tell politicians, who are addicted to spending our money, that government expenditures are good. And they tell consumers, who are affected by severe spending problems, that consuming is good, while saving is bad. In medicine, such behaviour would get you expelled from the medical profession; in economics, it gives you a job in Washington.

It's depressing to think that it's this straightforward, but when you see headlines like this it's difficult to disagree. If even an "austerity" government is swallowing Keynesian silliness about government spending "kickstarting" the economy (even for PR reasons), it's pretty clear that we're in trouble. I wrote about the recalculation view of recessions recently:

The policy implications of this perspective are quite signficant. Forget trying to "stimulate" your way out of a recession through spending or printing money – all you'll be doing is creating another type of false, unsustainable demand. You'll do the most damage if the stimulus is aimed at the unemployed, the people who need to retrain to cope with the real economy the most: reskilling takes time, and will be put off if there's some public works project nearby that will hire you instead. Even taking up unemployed people's time has an opportunity cost; justification for "stimulus" programmes ignore this.

It's the "unsustainable" that's key there – governments could reinflate the bubble, or inflate another one somewhere else, through fiscal or monetary policy. But we don't want to do that, because it's not sustainable and diverts resources from where there is real demand. The Coalition's "kickstart" for the economy is bad news: it's the wrong thing to do economically, and it suggests that the government is slouching towards Keynesianism again.

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