Did the midterms kill Keynesianism?

By Felix Salmon
November 10, 2010
Mark Thoma has a depressing column at the Fiscal Times today, saying that the Obama administration's failed fiscal stimulus threatens the entire idea that the government has a role to play in smoothing economic shocks and protecting the vulnerable from the vagaries of unconstrained capitalism:

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Mark Thoma has a depressing column at the Fiscal Times today, saying that the Obama administration’s failed fiscal stimulus threatens the entire idea that the government has a role to play in smoothing economic shocks and protecting the vulnerable from the vagaries of unconstrained capitalism:

We will be much less likely to use fiscal policy in the future, particularly government spending – much to the detriment of any future generations caught in a large downturn. As for the Fed, it still has considerable independence and a job to do in managing the economy, and it will continue to do that job. But the Fed will be far less willing to take bold steps to try to alter the direction of the economy, and far less likely to get the support from Congress it needs for another bailout to prevent a financial meltdown. And if the degree of independence the Fed currently enjoys is reduced through Congressional action, a very real possibility with people like Texas Rep. Ron Paul , a libertarian, as potential members of key oversight committees, even the routine management of the economy by the Fed could be affected.

On this view, Obama’s fiscal policy has been disastrous: not only did it fail to achieve its own stated aims, but it also resulted in “an unmistakable rejection of the government’s more muscular economic and regulatory policies.” As a consequence, we’re backsliding into a laissez-faire world, where calling Obama a Keynesian is if anything even more damaging than calling him a Kenyan.

Thoma concludes:

People should not be left to fend for themselves when they are hit by large negative economic shocks they had no hand in creating, and let’s hope that somehow, despite the emerging trend toward a more hands-off approach and pressures from rising national debt levels, that outcome can be avoided.

I suspect that he will get his wish. Politics is even more cyclical than macroeconomics, and what goes around in midterms tends to come around two years later. So long as an “it’s the economy, stupid” message can win elections, politicians will continue to push fiscal policies aimed at fixing what’s broken. Some of those policies will work better than others, but it’s stretching credulity to believe that the message of the midterms is that no such policies will ever be attempted again.

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