Keynesian Economics Can’t Get Us Out of this Jam

Keynesian policy conclusions, such as the wisdom of additional stimulus geared to money transfers, should come down to empirical evidence. And there is zero evidence that deficit-financed transfers raise GDP and employment—not to mention evidence for a multiplier of two.

Ironically, the administration created one informative data point by dramatically raising unemployment insurance eligibility to 99 weeks in 2009—a much bigger expansion than in previous recessions. Interestingly, the fraction of the unemployed who are long term (more than 26 weeks) has jumped since 2009—to over 44% today, whereas the previous peak had been only 26% during the 1982-83 recession. This pattern suggests that the dramatically longer unemployment-insurance eligibility period adversely affected the labor market.

Full Robert J. Barro editorial worth reading.

Comments (6)

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  1. Ken says:

    Great article.

  2. Buster says:

    The problem with Keynesian economics is the stimulus tends to prop up industries or firms which cannot sustain themselves once the government stimulus is discontinued. For instance, government hiring results in a cadre of federal workers who don’t want to go off looking for another job after the economy recovers. The firms remaining after Keynesian stimulus spending would not necessarily look like the firms that would remain is the stimulus was provided by consumers.

  3. Stephen C. says:

    Great editorial. Barro knocked it out of the park.

  4. Neil H. says:

    Agree with all the above. Barro is always first rate.

  5. Virginia says:

    Another problem for Keynesian economics: reality.

  6. Eric says:

    I’m no econ. expert (though I didn’t get a D in the subject like Gov. Perry), so I don’t know enough to know if the Keynesian theory is flawed. I do know that it has not been applied as Keynes intended in the US in recent years. Keynesian countercyclical spending goes both ways, and while the US government has been very good at continuing to spend in times of recession, they have not been good at paying down debt and cutting spending in times of surplus (presumably for political reasons). This doesn’t necessarily mean that the theory is wrong, but rather, our political system doesn’t allow it to be correctly applied.