2008–09 Keynesian resurgence

great Recession-era revival of interest in aggregate demand-side economics

Following the global financial crisis of 2007–08 and the subsequent Great Recession, there was a worldwide resurgence of interest in Keynesian economics among prominent economists and policy makers.

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  • Following the collapse of the American investment bank Lehman Brothers, and threatening to engulf the entire banking system, the British economist John Maynard Keynes returned to center stage. In the popular press and in the writings of many economists, Keynes featured prominently as governments around the world urgently sought ways to avoid economic collapse. (...) After only a brief delay, critics of Keynes’s ideas also began to appear; but the emergence of such critics only served to emphasize the fact of his return, for only a few years earlier Keynes’s name would not even have appeared in public debate about economic policy: his ideas were seen as having so little relevance that it did not even seem necessary to mention his name when discussing the performance of the economy.
    • Roger E. Backhouse and Bradley W. Bateman, ch.1 "Keynes Returns, but Which Keynes?" Capitalist revolutionary : John Maynard Keynes (2011).
  • Keynesian economics—the go-to theory for those who like government at the controls of the economy—is in the forefront of the ongoing debate on fiscal-stimulus packages. For example, in true Keynesian spirit, Agriculture Secretary Tom Vilsack said recently that food stamps were an "economic stimulus" and that "every dollar of benefits generates $1.84 in the economy in terms of economic activity." Many observers may see how this idea—that one can magically get back more than one puts in—conflicts with what I will call "regular economics." What few know is that there is no meaningful theoretical or empirical support for the Keynesian position.
    • Robert J. Barro, "Keynesian Economics vs. Regular Economics" Wall Street Journal (2011).
  • Thanks to the work of John Maynard Keynes and of Milton Friedman, we now have a better understanding of how governments can (at least in principle) reduce the severity of major economic downturns. Keynesian economics taught us that government spending can raise GDP and reduce unemployment.
    • Martin Feldstein, "Economic Conditions and U.S. National Security in the 1930s and Today" (2009).
  • But further analysis and experience soon raised doubts about the efficacy of these new tools. Empirical research indicated that the Keynesian multiplier was much smaller than earlier analyses had assumed, reduced by a crowding out of interest-sensitive spending caused by an induced increase in the demand for money and by the effect of the larger national debt on long-term interest rates. The leakage of demand through imports and the effect of the fiscal expansion on the exchange rate further reduced the multiplier.
  • From the late 1940s until the early 1960s, events seemed to prove the Keynesians correct. Then, beginning in the 1960s, several distinguished economists began to challenge Keynesian ideas. Their counterrevolutionary views, which in many ways mirrored those of the classical economists, were strengthened by events in the 1970s, when the economy’s behavior began to contradict some Keynesian ideas. But in 2008 and 2009, as the economy sank into the most serious worldwide recession since the Great Depression, Keynesian ideas were once again at the center of a heated debate about the causes of the problem and the appropriate remedies.
  • The same people who would never touch deficit spending are now tossing around billions. The switch from decades of supply-side politics all the way to a crass Keynesianism is breathtaking.
    • Peer Steinbrück, quoted in Stefan Theil, "Peer Steinbrück on the Global Economic Crisis", Newsweek (December 5, 2008)

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