The 2011 Nobel Prize in Economics was awarded to two American economists, Thomas Sargent and Christopher Sims citing their “empirical research on cause and effect in the macroeconomy.” Their development of analytical tools for macroeconomic analysis have driven yet another nail in the coffin of Keynesian economics. To date, that’s eight Nobel Prizes to free-market skeptics of Keynesianism and zero to its supporters… unless you count Barak Obama. The Obama Administration’s Council of Economic Advisors includes Lawrence Summers and Christina Romer, both all-star Keynesians who provided the calculations used to justify trillions of dollars in “stimulus” and bail outs.
I know what you’re thinking. What the hell is Keynesian economics? This sounds like inside baseball unless you’re into economics, but I’ll try to keep it simple. Keynesianism is a school of macroeconomics based on the theories of John Maynard Keynes first published in 1936. He argued that individuals making private economic decisions lead to inefficient macroeconomic outcomes so the state must manipulate monetary police, fiscal policy and interest rates to stabilize the business cycle. As you might expect, an economic theory that could be used to justify top-down centralized control of the economy has been widely popular among those decision makers at the top. The Keynesian model was essentially the only economic model guiding public policy until the 1970s and the appearance of “stagflation.”
Stagflation is when an economy experiences high inflation and high unemployment at the same time. In the Keynesian model this shouldn’t be possible because inflation and unemployment supposedly trade off. So their only answer is stimulus spending. They dump new money into the economy, which causes inflation but supposedly also jumpstarts spending and leads to recovery. It’s a cattle prod strategy. The economy occasionally slows down and you just have to zap it back into motion. But it’s not working anymore, and the failure of the Obama administration’s stimulus spending to achieve its stated goals is now undeniable.
So what the hell is going on?
Opponents of the Keynesian model say stimulus is more like binge drinking. You can get drunk on stimulus and enjoy a night of reckless spending, but the result is a stagflation hangover. Then you have a choice of either suffering through it or drinking more. But eventually your liver will fail because the stimulus causes the stagnation it’s supposed to remedy, which is about where we’re at now.
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