Tuesday, July 19, 2011

Have Conservatives Put Keynsian Fiscal Policy Out to Pasture?

link here to article

The use of fiscal policy in recessions has well know problems. In theory it makes sense for government to increase spending when consumers and business cut back on spending and unemployment is the consequence. The failure to use fiscal policy properly has its own problems. Its easier to increase government spending in a downturn if the government runs budget surpluses in good times. Trying to pass a stimulus bill after the expensive, and unpopular, bailout of the financial system was politically fraught with peril. It was also a mistake to believe that the government could ask for more stimulus if it underestimated the extent of the recession. The failure of the stimulus to work as predicted proved to its opponents that fiscal policy does not work. The failure to plan for the best uses of government spending during a downturn also created problems. Congress is not set up to figure out how to spend vast amounts of money quickly.

In addition to the well known problems in the use of fiscal policy, there were deeper issues that surfaced during, and after the debate, over its use. Many of the unresolved issues over the role of government in society colored the debate. It was a replay of the debates that occurred during the Great Depression of the 1930's. Conservative politicians and conservative economists had been working hard to overturn the New Deal and the economic ideas of Keynes for over half a century. They were not going to let a little thing like the Great Recession interfere with the progress that they had made. The greater issue at stake was that of the dominant ideology that shaped the way people think about the economy and its relationship with government. Neo-liberal ideology itself was being called into question.

The autopsy of the Great Recession and the ineffectual use of fiscal policy has produced its verdict. It will be difficult in the future to use fiscal policy as tool that is needed when monetary policy becomes less effective. But the bigger casualty may be the polarization of society and the lack of confidence in the ability of our political system to deal with practical issues that affect everyone.

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