2008–2009 Keynesian Resurgence - Criticisms

Criticisms

Keynesian ideas have also attracted considerable criticism in recent years. While from late 2008 to early 2010 there was broad consensus among international leaders concerning the need for co-ordinated stimulus, the German administration initially stood out in their reluctance to wholeheartedly embrace Keynesian policy. In December 2008, German Finance minister Peer Steinbrück criticised Gordon Brown's advocacy of Keynesian stimulus, saying “The switch from decades of supply-side politics all the way to a crass Keynesianism is breathtaking.” However, by the end of January 2009 Germany had announced a second stimulus plan which, relative to GDP, was larger than Britain's. George Osborne, at the time shadow Chancellor for Great Britain, opposed a return to Keynesian policy from as early as October 2008, saying "even a modest dose of Keynesian spending" could act as a "cruise missile aimed at the heart of recovery."

Critics focus on arguing that Keynesian policy will be counter-productive – reasons given include assertions that it will be inflationary, create more income disparity and cause consumers to rein in their spending even more as they anticipate future tax rises. In 2009 more than 300 professional economists, led by three Nobel Laureates in economics, James M. Buchanan, Edward C. Prescott, and Vernon L. Smith, signed a statement against more government spending, arguing that "Lower tax rates and a reduction in the burden of government are the best ways of using fiscal policy to boost growth."

Robert Barro, an economics professor at Harvard University (and author of the 1974–Ricardian Equivalence-theory that government stimuli are inefficient in a perfect market), has argued that stimulus spending may be unwise, claiming one of the factors the US stimulus package depends on for its effectiveness, the multiplier effect, is in practice close to zero – not 1.5 as he says the Obama team were assuming – which means the extra employment generated by the stimulus will be cancelled out by less output and investment in the private sector. A group of German economists have also argued that the size of the multiplier effect has been overestimated, while the Memorandum Group of German Economics professors have claimed the opposite and demanded a larger stimulus.

Economist Edward Prescott (author of the Real-Business Cycle Model that post-Keynesians hold failed to forecast the crisis) and economist Eugene Fama argue that stimulus plans are unlikely to have a net positive effect on employment, and may even harm it. Economist Jeffrey Sachs has argued that the stimulus and associated policies "may work in the short term but they threaten to produce still greater crises within a few years". In a June 2010 article, referring to the cooling of enthusiasm for further stimulus found among G20 policy makers at the 2010 G-20 Toronto summit, Sachs declared that Keynesian economics is facing its “last hurrah”.

There have also been arguments that the late 2000s crisis was caused not by excessively free markets but by the remnants of Keynesian policy. Luigi Zingales of the University of Chicago argues that "Keynesianism is just a convenient ideology to hide corruption and political patronage". In February 2009, Alan Reynolds, senior fellow at the Cato Institute, acknowledged the resurgence, then proceeded to argue that evidence from various studies suggest Keynesian remedies will be ineffective and that Keynesian advocates appear to be driven by blind faith. In 2009, historian Thomas Woods, an adherent to the Austrian school of economics, published the book Meltdown, which places the blame for the crises on government intervention, and blames the Federal Reserve as the primary culprit behind the financial calamity.

Sociology professor John Bellamy Foster questioned whether the resurgence has been truly Keynesian in character; he suggests those few economists he regards as genuinely progressive such as James Galbraith are now far from the centre of government. He also asserted that it is to Marx, and not to Keynes, that society should look for a full solution to economic problems.