The article by Ike Brannon and Chris Edwards (2009) analyses and criticizes the federal government’s intentions to execute a fiscal stimulus plan to inject $800 billion into the U.S. economy to fuel economic growth. This plan positioned Barack Obama and the key policymakers as the modern representatives of the Keynesian economic views, which appear to be highly controversial from the viewpoint of history and modern economic theory.
The founder of this movement, John Maynard Keynes, actively pushed it in the 1930s. His key ideas implied that massive financial inflows from the government could fuel economic growth through reduction of unemployment. Keynes argued that skyrocketing unemployment rates during the Great Depression were caused chiefly by the so-called “sticky wages”. The concept of sticky wages states that nominal wages are relatively inflexible, and are slow to adjust to the changing economic conditions (Arnold, 2010). Despite there was no substantial evidence in support of this opinion, the government followed Keynes’ plan, and attempted to influence natural economic cycles through fiscal stimulation of employment at the cost of higher inflation. However, research has shown that people are much more rational than Keynes estimated, and cannot be easily fooled by increased nominal wages when prices are rising at a faster pace, because real wages actually decrease in this scenario. Even though Keynes’ ideas had some economic sense in theory, the government was not capable of executing them in the right way. As a result, Keynesian ideas had been considered to have lots of flaws and lacking effectiveness. This fact furthered the popularity of the monetarism movement pioneered by Milton Friedman. Old-fashioned Keynesianism lost its dominant position among economic theories in the 1970s, and almost vanished in 1980s. The fact that short-term governmental fiscal intervention does not result in growth and the trade-off between inflation and unemployment is unviable left many macroeconomists in dismay.
However, a new movement of “rational expectations” theory had emerged and quickly found many followers. It stated that the government could not force the people to take certain actions by offering deceptive short-term incentives that lead to negative consequences in the long term. For instance, people understand that economic stimulation executed by the government will most likely result in increased inflation, so they will adjust their actions correspondingly, and the stimulation plan will have no effect.
Therefore, due to a massive level of criticism and unsettling historical evidence, the statements of Obama and his administration regarding the stimulus plan in 2009 confused the majority of economic community. While it is true that the Keynesian theory has considerably changed over the decades, and a large portion of its elements has been redefined and reconsidered, the stimulus plan of 2009 reflected the raw groundless concepts of the old-fashioned Keynesianism. A belief that massive financial inflows from the government into the economy would result in creation of a stunning four million jobs is overstated and unrealistic, to say the least.
Consequently, many respected economists have criticized the government’s stimulus plan. John Taylor (2008) of Stanford University stated the following in his WSJ article “Why Permanent Tax Cuts Are the Best Stimulus”: “the theory that a short-run government spending stimulus will jump-start the economy is based on old-fashioned, largely static Keynesian theories”. Representatives of popular economic media such as Forbes’ Brian Domitrovic (2012) expressed similar skepticism.
In conclusion, the article states that the government’s strives to apply limited economic knowledge to implement short-term solutions for fundamental problems such as unemployment and recession are highly disadvantageous for the economy. Governmental officials should seek advice from economists on long-term recovery mechanisms, rather than focusing on shortsighted and ineffective decisions such as the stimulus plan. Absence of long-term fiscal reforms from President Obama, and his actions in the light of the stimulus plan provide a disturbing evidence that he may lack sufficient insight to develop effective long-run economic solutions.
Arnold, R. A. (2010). Economics (9th ed.). Mason, OH: Cengage Learning
Brannon, I., & Edwards, C. (2009, Jan. 29). Barack Obama’s Keynesian Mistake. National Post. Retrieved from: http://www.cato.org/publications/commentary/barack-obamas-keynesian-mistake
Taylor, J. B. (2008, Nov. 25). Why Permanent Tax Cuts Are the Best Stimulus. The Wall Street Journal. Retrieved from: http://www.wsj.com/articles/SB122757149157954723