Very strange WSJ op-ed here by John Cochrane titled “An Autopsy for the Keynesians”. Cochrane doesn’t ever define “Keynesian” and because he doesn’t he’s able to engage in a series of dishonest generalizations about what “Keynesians” did and did not say. So let’s get that out of the way before we proceed. I agree with John Taylor that the difference between Keynesian and the Anti-Keynesians is a belief in the effectiveness of discretionary countercyclical policy intervention in the economy. And by any logical measure, some of the discretionary government interventions following the crisis were remarkably successful.
Cochrane, a leading economist at the Chicago School of Economics, says that Keynesian ideas have failed since the crisis. He goes on to cite a series of remarkably weak strawman arguments. For instance:
“Keynesians told us that once interest rates got stuck at or near zero, economies would fall into a deflationary spiral.”
This is an unfair generalization. Yes, some Keynesians said economies would fall into a deflationary spiral, but the more important point was that the economy would remain depressed due to the unusual circumstances surrounding the crisis and that discretionary government intervention could be used to help. In fact, the government did intervene and bailed out the banks and added trillions in net financial assets to the private sector at a time when households were deleveraging. If you understand basic accounting and banking then you have to be incredibly naive to argue that these policies did not help support the banking system and help support private sector balance sheets when they most needed it.
Cochrane goes on:
“Our first big stimulus fell flat, leaving Keynesians to argue that the recession would have been worse otherwise.”
This is blatantly misleading. The bi-partisan CBO estimated that the American Recovery and Reinvestment Act had a positive impact on the economy.
Cochrane continues:
“With the 2013 sequester, Keynesians warned that reduced spending and the end of 99-week unemployment benefits would drive the economy back to recession.”
This is also untrue. I specifically said that the economy wasn’t going to suffer a serious downturn in 2013 due to the sequester. I also said in a research note that the “austere” environment of 2013 wasn’t nearly as austere as many were making it out to be. I repeated this on the blog several times last year (see here, here and here).
It gets worse though:
“In Keynesian models, government spending stimulates even if totally wasted. Pay people to dig ditches and fill them up again. By Keynesian logic, fraud is good; thieves have notoriously high marginal propensities to consume.”
Keynesians now support fraud? I am surprised the WSJ even published an article that would misrepresent someone else’s views so egregiously. That assertion is just absurd and it discredits a usually thoughtful economist. I am mad at myself for even wasting the time to respond to such an obviously misleading article.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.