Scribblers and Madmen: Ezra Klein has a good column on the dangers of being wrong about Keynes. As he says, it’s very difficult to respond rationally to an economic crisis when politicians like Eric Cantor completely fail to understand what Keynesianism is all about.... The fact, however, is that these very same crude fallacies are being enunciated, with confidence, by famous and influential economists. Here’s Eugene Fama, arguably our most famous and influential finance economist:
Again, here is my argument in three sentences.
- Bailouts and stimulus plans must be financed.
- If the financing takes the form of additional government debt, the added debt displaces other uses of the same funds.
- Thus, stimulus plans only enhance incomes when they move resources from less productive to more productive uses.
Are any of these statements incorrect?
In his attack on me Krugman implicitly assumes that sentence 3 above is true; that is, the stimulus plan will on balance move resources from less productive to more productive uses. This is indeed the focus of the issue.
That’s exactly what Cantor is saying. It’s completely wrong; the whole point is that stimulus is supposed to put resources that would otherwise be unemployed to work. But at this point, a large part of the economics profession no longer understands that. So why should we expect politicians to get it?
The point is that GOP ignorance on macroeconomics isn’t like GOP ignorance on, say, climate science. In the latter case the bad science comes from a handful of essentially bought and paid for “skeptics”. In the case of macroeconomics, the nonsense is coming from established economists with lots of widely cited papers. Paul Ryan doesn’t have to distill his madness from the scribbling of hacks at Heritage (although he does that too); he can get it over some nice wine from tenured faculty at the University of Chicago.
Klein suggests that what went wrong in the Great Depression was that people hadn’t read Keynes yet; well, what went wrong and continues to go wrong in the Lesser Depression is that eminent economists, or at those so judged by their peers, turned their back on everything Keynes learned.