Politicians should have less, not more power to fight economic crises

A big issue I personally have with the concept of Keynesian economics is that, in practice, it involves way too much discretionary action by people who often really shouldn’t have the kind of economic power they do. The whole thing is part of a wider discretionary vs. rules-based economic policy debate, and something on which I find myself in remarkable agreement with the freshwater school in economics, who often don’t seem to make much sense on other grounds. There is a good argument to be made that when stuck in a liquidity trap (as long as something like that is even the big problem it is often portrayed to be) fiscal policy is the go-to economic tool to help get the economy back on track. Most of the standard arguments against this generally move somewhere between the either claiming it is totally ineffective or that it is so effective that the stimulus always proves to become permanent after a while. Both arguments are mostly wrong. But the real issue I see is that discretionary fiscal spending is, basically by definition, highly uncertain. The recent crisis has shown that when push comes to shove, politicians of all stripes will dig up their own copy of The General Theory and start throwing money at the problem. Yet, even though in theory it would be fairly easy to imagine a fixed rule which would be followed in these situations, in practice both the size and the direction of this throwing of money is highly arbitrary.

Continue reading