F's for Everyone

Last semester I was a teaching assistant for Intermediate Macroeconomics, taught from a Keynesian perspective. According to Keynesian analysis, when the economy is in recession and unemployment is above a mythic "Natural Rate of Unemployment", the government should use expansionary fiscal and monetary policy.

My students loved expansionary policy. They wanted to zap the economy with deficit spending and low interest rates whether unemployment was high, low, or in the middle.

Perhaps I should have been easier in my grading: as it turns out, politicians in Washington don't know any better either. Ben Bernanke has fallen over himself cutting interest rates, and you might soon get a $600 bribe rebate from the government which will stimulate you to re-elect your congressman the economy.

This is classic Keynesian policy. And it highlights what's wrong with Keynes applied. There are no tradeoffs in Keynes: there's a short run, and a long run, and they never really meet. We always live in the short run, and in the short run, it's better to make the economy boom.

Modern macroeconomics swept Keynes out of serious academic research in the 1970's; somehow, he lingers in undergraduate textbooks and the halls of power. Modern macro makes clear that a dollar spent today is borrowed from the future, in the form of foregone savings. To Keynes, growth was magic - in the neoclassical growth model, it's the result of hard work and thrift.

Instead of investing in America, Congress' lapdance for taxpayers will add twice to the burden that young Americans will bear: once as national debt for us to repay, and again as foregone savings that would otherwise have gone into long-term growth. We'll live in a poorer country with higher debts.