When Dorothy and her friends finally reach Oz, they present themselves to the almighty Wizard, only to eventually discover that he is just an illusion maintained by a charlatan hiding behind a curtain. This seems eerily akin to to the state of Keynesian economics. It does not matter that Keynesianism isn’t working for Obama. It does not matter that it didn’t work for Bush, or for Japan in the 1990s, or for Hoover and Roosevelt in the 1930s. In the ultimate triumph of theory over reality, the Keynesians say all that matters is the macroeconomic model behind the curtain showing that more government spending leads to more jobs and growth. Consider the recent report from the Congressional Budget Office (CBO), which claimed that Obama’s stimulus created at least one million jobs. As Brian Riedl of the Heritage Foundation noted:
CBO’s calculations are not based on actually observing the economy’s recent performance. Rather, they used an economic model that was programmed to assume that stimulus spending automatically creates jobs — thus guaranteeing their result. …The problem here is obvious. Once CBO decided to assume that every dollar of government spending increased GDP…, its conclusion that the stimulus saved jobs was pre-ordained.
But surely this can’t be true, you may be thinking. Our public servants in Washington would not make important policy decisions based on a model that automatically produces a certain result, would they? Peter Suderman of Reason pulls aside the curtain:
…those reports rely on assumption-packed models that effectively predetermine their outcomes; what they say, in essence, is that the stimulus worked because we assume it did. …That’s especially true when estimating government spending’s productive effects, which is accomplished by plugging numbers into a formula that assumes that government spending produces a multiplier—an increased return for every government dollar spent. In other words, it extrapolates from how much money is put in rather than from what has actually come out. And it does so using a formula that dictates that if money is put in, even more money will come out. According to the CBO’s estimates, depending on how the money is spent, one dollar of government spending can produce total economic activity of up to $2.50. What a deal! …for all practical purposes, the same multipliers that were used to predict how many jobs would be created are being used to estimate how many jobs have been created.
Interestingly, CBO’s analysis is completely schizophrenic. Its short-run budget numbers are based on free-lunch Keynesianism that assumes deficit-financed government spending boosts growth, while its long-run numbers are driven by an assumption that government borrowing is terrible for growth (which is why CBO actually claims higher taxes boost economic output – see, for example, Figure 3 of this CBO analysis). It is impossible to know whether the people at CBO actually believe their own work, or whether they are simply trying to please their political paymasters by producing results that (conveniently) match up with political preferences for more spending today and higher taxes tomorrow. You can draw your own conclusions, but keep in mind that CBO is now making the absurd claim that a giant new healthcare entitlement will reduce budget deficits.
But I digress. Let’s now give the defense of Keynesian model. The folks at CBO and other Keynesian who publish estimates that inevitably turn out to be wrong (Mark Zandi comes to mind) will claim that they are right because they are predicting results compared to what otherwise would have happened. So when they claim that Obama’s so-called stimulus created jobs, they are really saying that the economy would have lost even more jobs if the government didn’t spend all that money. The problem with this approach is that there is no independent benchmark, but this is not why Keynesianism is wrong. Indeed, most of the economic profession relies on this kind of “counterfactual” analysis. Instead, the problem with Keynesianism is that it fails the empirical test. The Keynesians may be good at constructing models, but that doesn’t mean much if the models don’t match the real world. Here’s what Kevin Hassett of the American Enterprise said in recent congressional testimony:
…most economists learned in graduate school that models like those relied upon most heavily by the CBO provide nonsensical results. The reason the original large scale Keynesian Macro forecasting models were discarded by most of the profession is that they make a simple logical error in assuming that individuals do not change their behavior based on the expectation of future policy. …Professor Barro has been one of the primary contributors to the macroeconomic time series literature that has tried to estimate effects from observed economic data, rather than assume affects, as is done by the Keynesian models. …Barro’s analysis is based on econometric evidence, a reliance on experience. The CBO analysis is based almost exclusively on speculation within the context of Keynesian Macro models that were discredited decisively in the 1970s. …Dating at least back to the seminal work of Nelson (1972), economists have known that the empirical time series approach significantly outperforms macroeconomic models in forecasting competitions. …Ashley (1988) compares data based time series forecasts to those from the large macro forecasters and concludes not only that the time series approach is superior, but that the macro forecasts were so bad that, “most of these forecasts are so inaccurate that simple extrapolation of historical trends is superior for forecasts more than a couple of quarters ahead.” …Finally, one should note that this literature, combined with an earlier public finance literature, raises questions concerning the welfare gain associated with short-term increases in spending. …Browning (1987) finds that the marginal cost ranges widely, between 10% and 300%. Thus, the welfare costs of paying the bill may be greater than the short-term boost to the economy from the most optimistic estimates. This literature would be consistent with Barro’s analysis that suggests the stimulus makes us worse off in the long run.
[…] written extensively about the flaws of Keynesian economics, and I’ve even narrated a video on the flaws of Keynesian […]
[…] written extensively about the flaws of Keynesian economics, and I’ve even narrated a video on the flaws of Keynesian […]
[…] ‘I’ve used humor to debunk Keynesianism. Professor Cochrane takes a more high-brow approach to show why the theory doesn’t make sense. […]
[…] ‘I’ve used humor to debunk Keynesianism. Professor Cochrane takes a more high-brow approach to show why the theory doesn’t make sense. […]
[…] ‘I’ve used humor to debunk Keynesianism. Professor Cochrane takes a more high-brow approach to show why the theory doesn’t make sense. […]
[…] endlessly explained why Keynesian argument is bad in theoryand a joke in […]
[…] endlessly explained why Keynesian argument is bad in theory and a joke in […]
[…] endlessly explained why Keynesian argument is bad in theory and a joke in […]
[…] endlessly explained why Keynesian argument is bad in theory and a joke in […]
[…] is the Wizard-of-Oz part of Keynesianism. No matter how bad it works in the real world, they always claim that it […]
[…] making a “silver lining” argument that a bad event will lead to more spending. In their world, what drives the economy is consumption, and it’s the role of government to either consume […]
[…] a real multiplier effect, unlike the nonsense we get from Keynesian stimulus […]
[…] a real multiplier effect, unlike the nonsense we get from Keynesian stimulus […]
[…] Keynesian Economics and the Wizard of Oz […]
[…] Keynesian Economics and the Wizard of Oz […]
[…] is best described as a perpetual motion machine or a Freddy Krueger movie (or perhaps even the man behind the curtain in the Wizard of Oz), but it’s safe to say I’ll be fighting this pernicious theory until my […]
[…] is best described as a perpetual motion machine or a Freddy Krueger movie (or perhaps even the man behind the curtain in the Wizard of Oz), but it’s safe to say I’ll be fighting this pernicious theory until my […]
[…] is best described as a perpetual motion machine or a Freddy Krueger movie (or perhaps even the man behind the curtain in the Wizard of Oz), but it’s safe to say I’ll be fighting this pernicious theory […]
While I’m really not a fan of deficit spending and I have reservations about the hidden inflation costs in Keynesian monetary policy, the core Keynesian economic policy assumptions that more consumers having more income is better for the market and that government spending is *capable* of helping the economy appear to be justified by the recoveries under FDR and Obama following the two biggest crashes in American history. However, since there are obviously other variables involved in an economic recovery than government intervention regardless of the level of that intervention, I am open-minded about other interpretations of the data, and I read this article from that perspective; I came away unconvinced in great part due to the citing of the stimulus as an example, because the stimulus was one-third middle class tax cuts (not spending), one-third went to state and local governments (reducing the federal burden on them; you can argue this only offset other new federal burdens on those jurisdictions, but then it’s those new burdens you have an issue with, not the stimulus), and one-third went to infrastructure spending (only a fraction of what was needed, and a necessary expense as opposed to an elective social program); this infrastructure spending directly created a large amount of temporary construction jobs (as opposed to having some indirect benefit not immediately tied to an overall creation of wealth).
[…] American leftists like Krugman, by contrast, do real damage because they use discredited Keynesian theory to argue that politicians should be spending even more money to “stimulate” an economy […]
[…] to spending programs. Seems like a straightforward task, but what if the bureaucrats assume that government spending “stimulates” the economy and they fail to measure the harmful impact of diverting resources from the productive sector of […]
[…] I’ve used humor to debunk Keynesianism. Professor Cochrane takes a more high-brow approach to show why the theory doesn’t make sense. […]
[…] I’ve used humor to debunk Keynesianism. Professor Cochrane takes a more high-brow approach to show why the theory doesn’t make sense. […]
[…] I’ve used humor to debunk Keynesianism. Professor Cochrane takes a more high-brow approach to show why the theory doesn’t make sense. […]
[…] there’s lots of additional material here, here, and here. My favorite cartoon on Keynesian economics also is worth […]
[…] right? Unfortunately, those numbers for jobs and growth are based on blackboard models that automatically assume rosy outcomes. Here’s how I explain it in the […]
[…] these numbers for jobs and growth are based on blackboard models that automatically assume rosy […]
[…] these numbers for jobs and growth are based on blackboard models that automatically assume rosy […]
[…] even to the point of implying that the growth-maximizing tax rate is 100 percent! And CBO is slavishly devoted to Keynesian economics, notwithstanding several decades of evidence that you can’t make an economy richer by taking […]
[…] But that logical approach is not easy when the Congressional Budget Office also is fixated on the Keynesian approach. […]
[…] that we should be surprised by this silly conclusion. The CBO repeatedly claimed that Obama’s faux stimulus would boost growth. Heck, CBO even claimed Obama’s spending binge was successful after the fact, even though it […]
[…] written extensively about the flaws of Keynesian economics, and I’ve even narrated a video on the flaws of Keynesian […]
[…] understood – or at least seemed to understand – that you don’t create jobs by diverting money from the private sector so it can be spent by politicians in […]
[…] written extensively about the flaws of Keynesian economics, and I’ve even narrated a video on the flaws of Keynesian […]
[…] To bolster his claim, he cites a handful of institutions that have Keynesian models, including the laughably inaccurate crowd at the Congressional Budget Office. Wow, what a revelation. Keynesians support Keynesianism. What’s next, a poll of Obama […]
[…] Bush and Obama take the place of Hoover and Roosevelt – with the same dismal results. Rate this: Share this:PrintEmailFacebookTwitterMoredeliciousDiggFarkLinkedInRedditStumbleUponLike […]
[…] Office for generating biased and inaccurate numbers. These are the clowns, after all, who say deficit spending stimulates the economy in the short run but they also rely on a model which seemingly predicts 100 […]
[…] Office for generating biased and inaccurate numbers. These are the clowns, after all, who say deficit spending stimulates the economy in the short run but they also rely on a model which seemingly predicts 100 percent tax rates maximize growth in the […]
[…] written extensively about the flaws of Keynesian economics, and I’ve even narrated a video on the flaws of Keynesian […]
[…] written extensively about the flaws of Keynesian economics, and I’ve even narrated a video on the flaws of Keynesian […]
[…] The ugly news, at least from the perspective of the Obama administration, is that the latest data is yet another piece of evidence that the White House was grossly mistaken when it claimed that bigger government would translate into better economic performance. […]
[…] The ugly news, at least from the perspective of the Obama Administration, is that the latest data is yet another piece of evidence showing that the White House was grossly mistaken when it claimed that bigger government would translate into better economic performance. […]
[…] The ugly news, at least from the perspective of the Obama Administration, is that the latest data is yet another piece of evidence showing that the White House was grossly mistaken when it claimed that bigger government would translate into better economic performance. […]
[…] The ugly news, at least from the perspective of the Obama Administration, is that the latest data is yet another piece of evidence showing that the White House was grossly mistaken when it claimed that bigger government would translate into better economic performance. […]
[…] my many frustrations of working in Washington is dealing with perpetual-motion-machine assertions. The classic example is Keynesian economics, which is based on the notion that you magically create additional economic activity by having the […]
[…] my many frustrations of working in Washington is dealing with perpetual-motion-machine assertions. The classic example is Keynesian economics, which is based on the notion that you magically create additional economic activity by having the […]
[…] my many frustrations of working in Washington is dealing with perpetual-motion-machine assertions. The classic example is Keynesian economics, which is based on the notion that you magically create additional economic activity by having the […]
[…] my many frustrations of working in Washington is dealing with perpetual-motion-machine assertions. The classic example is Keynesian economics, which is based on the notion that you magically create additional economic activity by having the […]
[…] my many frustrations of working in Washington is dealing with perpetual-motion-machine assertions. The classic example is Keynesian economics, which is based on the notion that you magically create additional economic activity by having the […]
[…] understandably wanted to discredit this analysis. But rather than expose Zandi’s laughably inaccurate track record, they asked the Chairman of the Federal Reserve, Ben Bernanke, for his assessment. But this is like […]
[…] understandably wanted to discredit this analysis. But rather than expose Zandi's laughably inaccurate track record, they asked the Chairman of the Federal Reserve, Ben Bernanke, for his assessment. But this is like […]
[…] understandably wanted to discredit this analysis. But rather than expose Zandi’s laughably inaccurate track record, they asked the Chairman of the Federal Reserve, Ben Bernanke, for his assessment. But this is like […]
[…] understandably wanted to discredit this analysis. But rather than expose Zandi’s laughably inaccurate track record, they asked the Chairman of the Federal Reserve, Ben Bernanke, for his assessment. But this is like […]
[…] Borrowing money from some people in the economy and giving it to some other people in the economy is not a recipe for better economic performance. Economic growth means we are increasing national income. Keynesian policy simply changes who is […]
[…] Borrowing money from some people in the economy and giving it to some other people in the economy is not a recipe for better economic performance. Economic growth means we are increasing national income. Keynesian policy simply changes who is […]
[…] Borrowing money from some people in the economy and giving it to some other people in the economy is not a recipe for better economic performance. Economic growth means we are increasing national income. Keynesian policy simply changes who is […]
[…] that result in bigger government. During the debate about the so-called stimulus, for instance, CBO said more spending and higher deficits would be good for the economy. It then followed up that analysis by claiming that the faux stimulus worked even though millions […]
[…] that result in bigger government. During the debate about the so-called stimulus, for instance, CBO said more spending and higher deficits would be good for the economy. It then followed up that analysis by claiming that the faux stimulus worked even though millions […]
[…] that result in bigger government. During the debate about the so-called stimulus, for instance, CBO said more spending and higher deficits would be good for the economy. It then followed up that analysis by claiming that the faux stimulus worked even though millions […]
[…] jumped to 10 percent and remains stubbornly high. We’ve already beaten this dead horse (here, here, here, here, and here), in part because the White House has embarrassed itself even further with […]
[…] jobs and growth. I addressed some of the profound shortcomings in CBO’s Keynesian model in a previous post, pointing out that the model is structured to produce certain results regardless of what happens in […]
In other words, the economic models used by the government as a worthless as the computer models used by the UN and academic advocates of anthropogenic global warming. Genius. Sheer genius.