June 10, 2011, 2:27 p.m. EDT
Death of Keynesianism?
Commentary: Is White House abandoning a discredited theory?
By Stephen Stanley
STAMFORD, Conn. (MarketWatch) — I do not subscribe to the conventional economics view of how the world works. If there are two theories that animate the Powers That Be when it comes to defining Economics, they are the Output Gap theory of inflation and Keynesianism (the idea that putting cash in consumers’ pockets will generate a huge spending response).
I have contended repeatedly over the last few years that if there is one good thing that may come out of the economic mess we have suffered through over the last several years, it might be a once-and-for-all discrediting of these two hoary 1960s mantras. Both were all but killed in the 1980s after they had contributed mightily to the stagflationary debacle of the 1970s but in the last decade both have been resurrected with a vengeance, much like a serial horror film character, to terrorize a new generation of victims.
Both of these theories have one important thing in common: they assume that all that matters in the economy is determined on the demand side. Supply-side considerations are all but irrelevant to economic performance in the world of a Keynesian Output Gapper. Putting an extra dollar of cash in the pocket of a consumer will generate a multiplier as the first person buys something, creating income for someone else, who in turn spends, etc., etc.
Similarly, the output gap model suggests that inflation is mostly a function of whether households have money to spend. If unemployment is high (i.e. an output gap exists), then wages are constrained and consumers will refuse to tolerate higher prices. There is no room for the supply side in either case.
Full story: http://www.marketwatch.com/story/death-of-keynesianism-2011-06-10
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