You and I aren't going to resolve the macro debate here -- there are better minds working on the job, and haven't gotten to the bottom of it.
But I wanted to take the opportunity to point out to other readers why they should be skeptical of the Keynesian prescription.
First, Keynes oversimplifies the system by assuming that everything is one big commodity. Everything is considered in terms of aggregate demand. The thing is, we don't have an aggregate demand problem in this recession: in aggregate, we're doing fine, and have been for some time. The problem is that we've got over-investment in some areas (like housing), and the need to shed that excess, and redirect it into sectors that have greater demand, is painful in any case. But the government's efforts to prop up housing costs is actually interfering with that process. And putting people to work on infrastructure projects as a stimulus doesn't do anything to help. Keynes's model assumes that demand (again, let me remind you that his terminology is "aggregate demand") is one homogeneous thing.
Second, inflation can't be used so effectively as a tool. Milton Friedman demonstrated pretty conclusively that such manipulations can't be effective, except in the very short term. The people aren't stupid, they can see that the government is inflating the currency, and then they take action to protect themselves from the losses that it would engender. The result is that the market will stymie the government's effort to benefit from inflation (not that the market will stop the inflation, but that it will interfere with any good that it might have done).
Further, inflation turns out to be a vehicle for redistributing wealth -- in the wrong direction. Before the inflationary pressure is felt, the first ones who get their hands on the new specie will enjoy its full value. And those people are the bankers. Do we want to make the banking sector the beneficiary of all that extra buying power?
The thing is, though, that there is considerable agreement among economists that there is such a thing as aggregate demand. The Keynesian, Monetarist, and Neo-Classical orthodoxies all acknowledge this as a useful concept though a monetarist will tend to think of AG in terms of (M*V) while a Keynesian will think in terms of (C+I+G+NX). You would have to talk to an Austrian School economist or someone even further from the mainstream to get criticism of aggregate demand as a concept. It's really hard to talk about how we can have low unemployment in 2007 and high unemployment in 2012 without using this, because the overall employment loss is much larger than just the housing sector.
And I'm not sure why you think that Milton Friedman was opposed to monetary stimulus in general. In fact, he rather explicitly was calling for monetary stimulus during Japan's crisis in the late 90s[1]. Yes, the fact that investors form expectations means that the Philip's Curve doesn't describe an economy with an active central bank, but this is very different from saying that monetary policy is ineffective. In fact, the idea that monetary policy won't work now is the typically Keynesian position (see "Zero Bound").
there is considerable agreement among economists that there is such a thing as aggregate demand.
I don't mean to entirely torpedo the idea. I'm just trying to say that it's not to be treated as gospel: it's just a useful way to conceptualize some problems.
(And I may have been stumbling in my explication, since I'm really a professional software engineer, and only an amateur economist.)
The usual measure of aggregate demand is GDP. The United States is by this measure experiencing fairly weak growth, and so it isn't an open-and-shut case that the country is in a liquidity trap the way Spain and Greece are.
If you want me to take a position on the United States - sure - I'll believe the US isn't facing a problem with weak aggregate demand when borrowing rates increase, inflation picks up or unemployment comes down. Right now the American economy looks a lot like the Japanese economy in the 1990s, a flight to safety among investors reflecting a preference for liquid assets over real investment. The most vehement critics of Keynesian models tell us this is wrong, but they've been predicting soaring inflation and spiking interest rates for FOUR of the last FOUR years. And these were also generally the same folk trying to invent a debt crisis at a time when the US was unarguably in a liquidity trap and could essentially borrow for the long-term at zero percent.
It is hard to escape the conclusion that right-wingers hate Keynes because they associate his ideas with some vague notion of socialism, and most aren't educated or well-read enough to understand what he is actually saying. I'm not putting you in this category since you clearly state you don't believe the United States is in a liquidity trap and that removes any unambiguous point of contention between you and Keynes as far as I can tell, but I also don't think your critique is necessarily on-topic since you seem to have something against Keynesianism and I can't tell why: Keynes never advocates inflation and doesn't advocate subsidizing bankers. It sounds like you're bothered much more by monetary policy than anything else.
You didn't deserve a downvote, I don't think, so I gave you a bump.
I also don't think your critique is necessarily on-topic since you seem to have something against Keynesianism and I can't tell why
Number 1: What I know about it seems too simplistic, and it contradicts other models that I already know much more about.
Number 2: Not an argument against Keynesianism itself, but it's application. As you note, many on the right "associate his ideas with some vague notion of socialism". I think that's because Keynes's ideas are misappropriated by big-government types (primarily but not exclusively on the Left) and used incorrectly as justification for what they wanted to do anyway.
As I've noted elsewhere in this thread, a proper reading of Keynes would give us a plan for the entire business cycle: yes, we need to spend to stimulate in the bust; but the other side of that coin is that we need to save during the boom so that we've got something to use to stimulate with. The very same advocates of the Keynesian approach to solving the bust are unanimously uninterested in following through with the other half of his prescription. This reveals to me that they're intellectually bankrupt, and just using a convenient egghead as cover to allow them to continue their game plan of pandering for votes by promising favors to all.
> The very same advocates of the Keynesian approach to solving the bust are unanimously uninterested in following through with the other half of his prescription.
Who are these ghost economists? Brad DeLong? Paul Krugman? Christina Romer? Larry Summers? I can't think of a single non-right-wing economist who advocates anything close to this. If anything, the orthodox position since the 1970s has been an overwhelming preference for monetarism, originally by targeting growth in the money supply (see Friedman's "we are all Keynesians now") and then by inflation targeting once the former didn't work. Fiscal stimulus is advocated only at the lower bound, when it becomes impossible to lower interest rates further since they are already at zero. Fiscal restraint is preferred since government spending is perceived to be dangerous and people want ammunition for bad times.
And where is the hypocrisy? The last period of fiscal sanity in the US came during the Summers period under Clinton, which put the national budget in surplus and put the country well on track to eliminate the debt. The intellectual tradition which destroyed this came from supply-side Republicans economists like Mankiw who helped ram through a series of top-heavy tax cuts, expanded military spending and eventually pushed through a medicare giveaway to big pharma. So perhaps the intellectual traditional of "pandering for votes by promising favors to all" is not the one you think it is.
I'm not talking about economists, I'm talking about politicians who know nothing about economics, but use it as a convenient excuse (although I'd like to single out Krugman for becoming a complete political hack and eschewing so much of what he personally wrote as an economist).
The last period of fiscal sanity in the US came during the Summers period under Clinton
That's certainly true, and in retrospect I commend Clinton for it (though I have to confess to being a detractor at the time). But a President does not define a party or an ideology. Recall how much arm-twisting Clinton needed to do in order to get welfare reforms passed.
And I believe I said that both parties are guilty, so don't read my comments as a defense of Conservatism by any means. With very few exceptions, the legislators on both sides of the aisle have little interest in fiscal restraint, even (especially?) in boom times.
Yes, I oppose military increases, Medicare Part D. But I also oppose their Liberal counterparts. While given our current fiscal mess, taxes -- perhaps even tax hikes -- need to be part of the solution, in the long run the whole thing needs to be scaled back drastically (Ryan is barely a warm-up), and that should allow for lower taxes in the long run.
But I wanted to take the opportunity to point out to other readers why they should be skeptical of the Keynesian prescription.
First, Keynes oversimplifies the system by assuming that everything is one big commodity. Everything is considered in terms of aggregate demand. The thing is, we don't have an aggregate demand problem in this recession: in aggregate, we're doing fine, and have been for some time. The problem is that we've got over-investment in some areas (like housing), and the need to shed that excess, and redirect it into sectors that have greater demand, is painful in any case. But the government's efforts to prop up housing costs is actually interfering with that process. And putting people to work on infrastructure projects as a stimulus doesn't do anything to help. Keynes's model assumes that demand (again, let me remind you that his terminology is "aggregate demand") is one homogeneous thing.
Second, inflation can't be used so effectively as a tool. Milton Friedman demonstrated pretty conclusively that such manipulations can't be effective, except in the very short term. The people aren't stupid, they can see that the government is inflating the currency, and then they take action to protect themselves from the losses that it would engender. The result is that the market will stymie the government's effort to benefit from inflation (not that the market will stop the inflation, but that it will interfere with any good that it might have done).
Further, inflation turns out to be a vehicle for redistributing wealth -- in the wrong direction. Before the inflationary pressure is felt, the first ones who get their hands on the new specie will enjoy its full value. And those people are the bankers. Do we want to make the banking sector the beneficiary of all that extra buying power?