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Faith-Based Economics?

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Written by Dean Baker   
Thursday, 15 December 2011 11:15

This post is part of a month-long discussion on Cato Unbound on John Maynard Keynes.

After Tim Congdon’s response to my earlier piece, I am a bit confused what we are debating. First, to finish up the simplest point, Congdon’s original post expressed unhappiness about President Obama’s $800-billion-a-year fiscal stimulus. I pointed out that it was actually closer to $300 billion a year. Now Congdon has come back with data from the International Monetary Fund showing the structural deficit was almost $800 billion higher in 2011 than in 2007.

That’s fine, except that most of the increase in the structural deficit (measured as a share of GDP) came in 2008, under President Bush’s watch. Fiscal 2009 began in October of 2008, which means that one-third of the fiscal year was over before President Obama entered the White House. I don’t work for President Obama, and furthermore I am not troubled by someone raising the deficit in response to an economic collapse, but I just don’t understand the logic of his assertion: “In that sense they [the Obama administration] did endorse a fiscal boost that amounted to almost $800 billion, at an annual rate, relative to the last recession-free year of 2007.” Most of this boost was the result of President Bush’s policies.

I referred in my original note to research that indicated the stimulus was as effective as, or even somewhat more effective than, had been predicted. Congdon responds by saying:

Like Milton Friedman, I reject this sort of analysis. As Friedman said in a 1996 … “I believe it to be true…that the Keynesian view that a government deficit is stimulating is simply wrong. A deficit is not stimulating because it has to be financed, and the negative effects of financing it counterbalance the positive effects, if there are any, on spending.”

Read the rest of the post here at Cato Unbound.


Tags: economy | Keynes | recession

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