Inside the Crystal Ball by Maury Harris

Author:Maury Harris
Language: eng
Format: epub
ISBN: 9781118865101
Publisher: Wiley
Published: 2015-01-27T00:00:00+00:00

Keynesian Controversies

The basic methodology outlined above is not what makes Keynesian economics controversial. Rather, from the perspective of a forecaster, there are potential problems with how his followers apply Keynes' theories.

Writing during the Great Depression, Keynes was explaining that recessions are not self-correcting in the absence of government intervention to stimulate demand. He argued that there would not always be enough investment to recycle saving into demand. His focus, appropriate to the time, was on economic weakness and vulnerability. However, Keynesians can remain too pessimistic in more typical, less extreme cyclical settings, in which households and businesses often wish to borrow and spend savings.

Keynesians can also overestimate the effects of fiscal policy actions on government spending and taxes that raise Federal budget deficits. Specifically, critics claim deficits are less stimulating than otherwise when the accompanying government borrowing raises interest rates and/or is viewed adversely by the business community. Some economists have also argued that the anticipation of future taxes, needed to repay added government debt, can reduce consumer spending.

Keynesian economists are identified with advocacy of anticipatory countercyclical monetary and fiscal policies that can be impractical to implement. Among Keynes' followers are econometricians enamored with the forecasting potential of their models. These economists have argued that policymakers can use those models to anticipate potential weakness and preempt it with interest rate and fiscal policies that, based on their models' projections, will produce positive outcomes. As a practical matter, there are limits to how well forecasters can anticipate potential weakness and how much offsetting stimulus is required.

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