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What Keynes really meant

Over at this bloggingheads conversation with Arnold Klings, some commenters thought we weren't fair to Keynes. Here is the response I posted there:

What did Keynes really mean? It's hard to say. His masterwork is a bit
opaque and has been interpreted by many generations of acolytes.

In the current environment, we are told that consumers aren't spending
so aggregate demand has fallen. (This is typically discussed as if the
reason for this drop is irrelevant). Therefore government must step in
as the spender of last resort. This was the defense of the so-called
stimulus package of $787 billion. Those who defended it did not defend
it on the merits of what was in it, but rather simply on its magnitude.
And many of those defenders (including Paul Krugman and Robert Reich)
said it was not big enough.

Their basic argument is Keynesian in nature—that aggregate demand,
C+I+G, must be boosted up to its former level and that this can be
achieved through an increase in G. And according to the Administration
(and the study it produced written by Jared Bernstein and Christina
Romer), every dollar of government spending would produce 1.57 (or was
it 1.54?) dollars of income.

The presumption is that it does not matter what G is spent on. The most
important thing is to get spending into people's hands so that they
will in turn spend it and the multiplier will kick in.

The presumption is that the multiplier is a constant. It does not
matter how G is financed. It does not matter what G is spent on. It
does not matter why C is down. G just needs to go up. This is silly

The presumption is that if G goes up, C will stay unchanged. This
ignores any possibility that people will be aware that their taxes are
going to go up very dramatically in the future and they will do nothing
in response.

The presumption is that the borrowing or printing of money to finance the increase in G will have no effect on aggregate demand.

The presumption is that the people who get the money from the government will spend it rather than save it.

These last points are empirical questions. Actual estimates of the
multiplier are all over the map. We don't have a lot of evidence on
either side that is reliable. Anecdotal evidence is generally
restricted to World War II on the encouraging side and Japan's recent
experience on the discouraging side.

I have argued
that economists generally came down on one side or the other of the
stimulus package based not on their economic understanding but on their
political and philosophical biases. I still believe that. I think we're
in macroeconomically uncharted territory.

Interested viewers might also enjoy this debate between Brad DeLong and Michele Boldrin. Boldrin's also argues that simply increasing G is not sufficient to induce recovery.