Thursday, June 13, 2013

Keynesian Economic Theory Still Performing Miserably

I've chronicled how the real world economy has pummeled the Keynesian economic viewpoint these past few years.
These developments represent important wins versus competing viewpoints on the idealogical scoreboard. But it doesn't stop there, traditional, demand-side theory on economic growth, aka Keynesianism, is currently taking a beating in the real world laboratory. The blow could eventually prove fatal. If the US's economic torpor persists despite unprecedented "stimulus"
 Scott Grannis updates the miserable performance of modern Keynesianism in the real world.

Note to Keynesians: The massive increase in the deficit that occurred from late 2008 through 2009 was supposed to "jolt" the economy back to life, but instead we got the weakest recovery in history. If anything helped get the recovery started, it was the Fed's first Quantitative Easing program, which supplied the cash and cash equivalents that were so desperately needed in a world that had become suddenly very risk-averse. Similarly, the huge decline in the deficit that began in 2010 would have choked most Keynesian models, leading to a painful contraction of economic activity that never occurred. Massive fiscal stimulus was followed by excruciating fiscal contraction, yet the economy grew at a fairly steady and unimpressive pace of about 2% throughout—with surprisingly little variation, as the chart above shows.

This recovery has been a perfect laboratory test of the predictive powers of Keynesian economic models, and they have failed utterly. It's time to throw Keynesian economics into the dustbin of history.


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