Why Are We All Keynesians Again?
Many people thought Keynesianism died decades ago. Why has it suddenly come back? Spending $787 billion of China's money--which they're only lending us so that they can peg the renminbi and prop up their unnatural current account surplus--on a policy that could very well be useless, troubles me greatly. The unfortunate part is that we will probably never be able to disentangle the knarly web of causality to determine whether this test of Keynesian stimulus was a success or failure.
Despite their generally libertarian slant, a Cato Institute Bulletin has a decent overview, describing how even leaders of New Keynesianism (Paul Krugman excepted, of course), find it difficult to justify the current government action in economic terms. But still, the public is smitten with this return to old economic theory. Even The Economist, the ardent defender of free trade, is awash with nostalgia for the Cambridge school in their recent leader, and in their briefing on Irving Fisher.
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Perhaps Keynesian economics is enjoying a rebirth because unregulated free market economics failed thanks to an excess of greed. The theory may be sound, but the execution weak. Reality does trump theory.