Tuesday, September 6, 2011


As talk turns to another stimulus bill, this time under the guise of a 'jobs' bill, it is worth revisiting the moral hazard involved in believing that the economics you got taught in school is true. It isn't. A significant number of top economists believe that Keynesian stimulus as a response to economic doldrums was discredited as a theory years ago.

'The only interpretation under which the house statement is true is that "we"—the English/American people and their elective representatives—are all Keynesians now. Keynesianism has conquered the hearts and minds of politicians and ordinary people alike because it provides a theoretical justification for irresponsible behaviour. Medical science has established that one or two glasses of wine per day are good for your long-term health, but no doctor would recommend a recovering alcoholic to follow this prescription. Unfortunately, Keynesian economists do exactly this. They tell politicians, who are addicted to spending our money, that government expenditures are good. And they tell consumers, who are affected by severe spending problems, that consuming is good, while saving is bad. In medicine, such behaviour would get you expelled from the medical profession; in economics, it gives you a job in Washington.' - Prof Luigi Zingales, Debate in the Economist, March 2009

Accurate Reality: The pervasive teaching of Keynesian theory misleads the US public who don't focus much on economic theory. This pervasive 'understanding' of the argument to spend in the face of economic slowdowns provides politicians with aircover to do the wrong thing and spend our money on their cronies.

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