Time to Plan for a Post-Keynesian Era

Jeffrey Sachs from the Earth Institute at Columbia University recently had a comment published in the FT at http://www.ft.com/cms/s/0/e7909286-726b-11df-9f82-00144feabdc0.html entitled "Time to Plan for a Post-Keynesian Era".

Here is my response in the form of a letter to the editor.

Dear Sir,

Jeffrey Sachs’s erudite dismissal of Keynesianism, although intellectually stimulating, flies in the face of much of what Keynes might have thought about the role of governments when confronted by the stylized fact of the business cycle.
Keynes would not have advocated a short-run fiscal boost to counter a major downturn, and nor would he likely have been comfortable about high levels of public debt. I doubt very much that Keynes would have advocated temporary tax cuts or car scrappage schemes, given what we know about the advice he metered out to governments during the Great Depression. On the other hand Keynes would have likely been in complete agreement with Sachs’s analysis of the broken politics which surrounds the US economic situation. US taxes are too low, given what is expected of the public sector, and spending programs are too entrenched to allow the flexibility to be enterprising in terms of public investment. Keynesianism is not dead, and many economists believe it still to be the best solution in the face of an unprecedented downturn in the global economy. And after all, Keynes’s original advocacy of public investment in the 1930s is also one of the hallmarks of the current administration’s emphasis on both stimulus and investment.

The myth that does need to be broken, however, is that there exists “the threat of bubbles if we pursue economic illusions”. This misguided thinking implies that the bubbles which likely cause business cycles can be avoided and are not “hard-wired” into human behavior. Certainly given the regularity of the business cycle, the empirical evidence provides extremely strong evidence to the contrary.