From The Heritage Foundation and AEI:
Economic and Political Thought
Why Keynesianism Works Better in Theory Than in Practice
by Tino Sanandaji
American Enterprise Institute
December 01, 2011
The first definition of “Keynesianism” is a theoretical explanation for recessions, a diagnosis of the illness. The second definition of “Keynesianism” is a policy recipe for coping with recessions, a cure for the disease of recessions. The diagnosis may be correct, but the medicine most commonly associated with it has been shown to be surprisingly impotent. One reason for this is the role played by expectations and fear. As deficits grow, the public becomes more worried about the future of the economy and responds by saving more. At some point, deficit spending starts doing more harm than good by adding to fear and uncertainty. Despite the failure of deficit spending to fix crises, Keynesianism should not be abandoned as a paradigm. During the crises, Keynesianism has demonstrated its usefulness not only as a diagnostic tool, but as an intellectual framework for discussing the business cycle.
URL: www.american.com/archive/2011/november/our-two-keynes-problem
Economic and Political Thought
Why Keynesianism Works Better in Theory Than in Practice
by Tino Sanandaji
American Enterprise Institute
December 01, 2011
The first definition of “Keynesianism” is a theoretical explanation for recessions, a diagnosis of the illness. The second definition of “Keynesianism” is a policy recipe for coping with recessions, a cure for the disease of recessions. The diagnosis may be correct, but the medicine most commonly associated with it has been shown to be surprisingly impotent. One reason for this is the role played by expectations and fear. As deficits grow, the public becomes more worried about the future of the economy and responds by saving more. At some point, deficit spending starts doing more harm than good by adding to fear and uncertainty. Despite the failure of deficit spending to fix crises, Keynesianism should not be abandoned as a paradigm. During the crises, Keynesianism has demonstrated its usefulness not only as a diagnostic tool, but as an intellectual framework for discussing the business cycle.
URL: www.american.com/archive/2011/november/our-two-keynes-problem
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