Keynesian and Pseudo-Keynesian Propositions: Just a brief further thought on the anti-Keynesian flip-out. Consider three propositions:
Deficit spending is expansionary, other things equal.
Deficit spending is always expansionary.
Only deficit spending is expansionary.
Keynesian economics basically asserts proposition 1. Testing that proposition is tricky, but that’s always the case in economics; you have to look for natural experiments, or be very careful about controls. Christy Romer talks about this in her excellent speech (pdf) on the topic. But when you do it right, the evidence strongly supports proposition #1.
Proposition #2 is, well, stupid. It’s what you see in bad comment threads, where people rant about how if Keynesian economics was right, Greece would be a miracle economy.
Alas! It is not just in bad comment threads. It is--or, at least was back in 2009-the University of Chicago's Myron Scholes Professor of Finance John Cochrane too:
"Private Jets": If you've got magic, why not 2 trillion dollars [of stimulus]? Why not 10 trillion dollars? Why not 100 trillion, and we can all have private jets?…
And Paul continues, focusing on Tyler Cowen's "The new jobs report: The 'big loser' here?: Old Keynesianism…. The big winners, apart from the American public?: real business cycle theory…"
And proposition #3 is worse. Which is why I am boggled to see professional economists apparently believing that this is the proposition to focus on.
I am still looking for a RBC theory that predicts that more than three years after an adverse monetary-financial shock the unemployment rate will still be elevated above trend by 3.5% points. I am still looking for an "Old Keynesian" who would take the fact that the unemployment rate is elevated above trend by only 3.5% points more than three years after an adverse monetary-financial shock as a failure to confirm their view of the worl.