When I was younger, the standard view of the Great Depression was that FDR saved the country. Then some people wondered whether the economy had really recovered–there was a bad spike in unemployment in 1938. The new narrative was that while FDR had done his best, he hadn’t really been much of a Keynesian–it was the war that was the real Keynesian stimulus. I think this narrative was wrong as well. As Bob Higgs as shown , the war was good for bomb-makers and airplane manufacturers. But the Keynesian multiplier proved disappointing for the rest of the economy. You can disagree with Higgs or not. But my main point is that the narrative changed from “FDR proved Keynes was right” to “The New Deal didn’t disprove Keynes because the New Deal was never tried.”
So how will the Keynesians explain the failure of the Obama stimulus spending?
The first answer is that it didn’t fail–it’s working! Could be, but explaining that the economy would be even worse than it appears to be without the package is a hard marketing sell. So a new narrative is developing: the stimulus package failed because it was so puny. Of course it failed! The stimulus was never tried. There’s some truth to this–it’s called the $787 billion stimulus plan but only a little more than $400 billion has been spent so far. But that’s OK, in politics you try whatever sticks. So if “it worked!” doesn’t work, you go with “it was never tried.” It’s a variant of my favorite reaction to any new theory–it’s obvious or it’s wrong. Either one works to discredit. They both can’t be right, but that doesn’t matter. In the current debate, you have to make Obama look good so there “it worked” or “it wasn’t tried.”
Paul Krugman, who wanted an additional $2 trillion of spending is a natural narrator for the “it was never tried” narrative. In a post titled “What Went Wrong: The Rahm Factor, Krumgan quotes a recent interview with David Obey:
The problem for Obama, he wasn’t as lucky as Roosevelt, because when Obama took over we were still in the middle of a free fall. So his Treasury people came in and his other economic people came in and said “Hey, we need a package of $1.4 trillion.” We started sending suggestions down to OMB waiting for a call back. After two and a half weeks, we started getting feedback. We put together a package that by then the target had been trimmed to $1.2 trillion. And then [White House Chief of Staff] Rahm Emanuel said to me, “Geez, do you really think we can afford to come in with a package that big, isn’t it going to scare people?” I said, “Rahm, you will need that shock value so that people understand just how serious this problem is.” They wanted to hold it to less than $1 trillion. Then [Pennsylvania Senator Arlen] Specter and the two crown princesses from Maine [Sens. Olympia Snowe and Susan Collins] took it down to less than $800 billion. Spread over two and a half years, that’s a hell of a lot of money, but spread over two and a half years in an economy this large, it doesn’t have a lot of fiscal power.
So it was all Rahm Emanuel’s fault that Keynesianism wasn’t tried this time. Keep an eye out for this narrative. Especially if unemployment goes up in any of the reports coming before the November elections. You’re going to hear that our problems are caused by a failure to really try deficit spending. And the reason is going to be Rahm or the Republicans. Especially the Republicans. They demonized spending more than the paltry $787 billion because they were worried about the deficits and stupid voters listened to them. Watch for it.