How much more stimulus is needed? It’s always “just a bit more.”
When it has been pointed out that Keynesian policies have not rescued the American economy, but seemingly have made it worse, Keynesians respond in one of two ways. They claim that things would have been so much worse if unprecedented amounts of stimulus had not been supplied by world central banks and governments. Or they claim that even this amount of stimulus just was not enough. It should have been larger still.
Nobody of course can prove what might have happened if things had been different. This is not a testable argument. It is equally possible to argue that we would already have recovered if the stimulus had not been undertaken, that it was just giving more drink to a drunk and will make the ultimate hangover much worse. Avoiding a stimulus response did seem to keep the depression of the early 1920’s short and also the East Asian financial crisis of the late 1990’s. By contrast, stimulus was provided in our Great Depression, after Japan’s crash in the 1980’s, and after our recent Crash and results have not been good.
Another problem with the Keynesians’s argument is that they are so vague about it. When asked in the depth of the crisis in 2008 and early 2009 how much stimulus was needed, leading Keynesians such as Krugman, Shiller, and Romer danced around the question and refused to say specifically.” More than you would think” is typical of the answers given then. Even now advocates of more stimulus refuse to say exactly how much is needed, what kind, or for how long.
In the article below, another problem with the Keynesian argument is noted. After the Crash of 2008, the Chinese did supply much more stimulus, relative to the size of their economy, than we did. At first this seemed to go well. But then it became clear to most that it had blown up a major Chinese bubble. China is already worrying everyone, including honest Keynesians, and if its bubble blows up, which seems more and more likely, there will be even more egg on the face for Keynesian die-hards.
Of course none of this will be an intellectual exercise. If China blows up, the entire world economy will pay a horrific price. World incomes will fall, poverty will deepen, and more people will starve to death. This is what happens when we get economics wrong.
Hunter Lewis 11-4-2011