Krugman: Why Believe In Keynesian Models?

[pampango]

A correspondent asks a good question: what evidence makes me believe that Keynesian economics is broadly right, given the relative absence of experience with large fiscal stimulus programs?

I’d answer that question with several points.

First, we’re talking about a model, not just a prediction about the impact of spending increases. So you can ask about the ancillary predictions of that model as opposed to rival models. Anti-Keynesians assured us that budget deficits would send interest rates soaring; Keynesian analysis said they’d stay low as long as the economy remained far from full employment. Guess who was right?

Second, while we don’t have a lot of postwar experience with fiscal stimulus, we do have a lot of experience with anti-stimulus, that is, austerity — and that turns out to be reliably contractionary. Again, it’s hard to think of a model in which austerity is contractionary but stimulus isn’t expansionary.

Finally, there is evidence from fiscal expansions in the 1930s, which actually did lead to economic expansion too.

http://krugman.blogs.nytimes.com/2011/10/11/why-believe-in-keynesian-models/

[Stardust]

1. K&R

[BootinUp]

2. Krugman has been beating the Chicago "fresh water" economists

like red headed stepchildren for a few years now. Reading his blog is one of my favorite things to do.