Economic Theory

Via Mark Thoma:

Simon Wren-Lewis:

Speak for yourself, or why anti-Keynesian views survive:

The evidence for the Keynesian worldview is very mixed. Most economists come down in favor or against it because of their prior ideological beliefs. Krugman is a Keynesian because he wants bigger government. I’m an anti-Keynesian because I want smaller government.

Statements like this tell us rather a lot about those who make them. As statements about why people hold macroeconomic views they are wide of the mark. Of course there is confirmation bias, and ideological bias, but as the term ‘bias’ suggests, it does not mean that evidence has no impact on the views of the majority of academics.

The big/small government idea makes no theoretical sense. Why would wanting a larger state make someone a Keynesian? Many Keynesians, and most New Keynesians, nowadays acknowledge that monetary policy should be used to manage demand when it can. They also know that any fiscal stimulus only works, or at least works best, if it involves temporary increases in government spending. So being a Keynesian is not a very effective way of getting a larger state.

I think that the answer to the question posed is answered in the very next sentences.  If you want fiscal policy to be used to impact demand, then you had better have a pretty large state, as a percent of GDP.  And the bigger the impact you are looking for, the bigger the size of the government needs to be, to start out from.  If government was, say, 15% of GDP, then it might be a real challenge to boost demand by 5%.  That would be a 33% increase.  But if government starts out at 25%, then that 5% looks a lot more manageable.

Another way to look at it:  If you are Keynesian, you want the government to manage demand, which requires more government.  If you are anti-Keynesian, you want government to do less in terms of managing the economy, so less government is needed.



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