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Are We All Keynesians Again?
GOVERNMENT MAY BE KEYNESIANS AGAIN, BUT IS EVERYONE ELSE?
Using economic stimulus to stabilise economies, was so much in vogue until the early 1970s that Richard Nixon famously declared ‘We are all Keynesians now.’
But are we really all Keynesians again? There are doubters, but their voices are not being heard above the clamour says a new report being released today by the Centre for Independent Studies.
In the report Are We All Keynesians Again? Robert Carling warns that policymakers need to be much more cautious and modest in their expectations of what fiscal stimulus can achieve.
‘Policymakers seem to have forgotten the lessons learned in the 1970s and 1980s about the limits to effective fiscal stimulus, in their rush to prop up sagging economies.’
Carling outlines the main reasons we should be sceptical of the government’s stimulus plans:
- Governments notoriously get the timing wrong, and by the time the economic impact of a stimulus is felt, the need for it may have passed or at least diminished.
- Governments will keep stimulating long after the economy has started to recover, because their economic policies are driven by unemployment statistics, which are always the last economic indicator to turn around.
- This extra government spending becomes entrenched and increases the size of government over the business cycle.
- Bad public policy, such as subsidies to industry, ‘make work’ schemes, or rushed adoption of public investment options, regardless of their economic and social returns, impose economic efficiency costs.
‘Throughout economic history, fiscal expansion has probably never prevented a recession, nor has it been solely responsible for a sustained recovery.’ Carling says ‘there is a limited role for fiscal stimulus worthwhile, but expectations of its effects should be modest.’
Instead the government should implement permanent changes in tax and benefits which will improve incentives for individuals and businesses to invest and work, says the report.
The embargoed report is available at www.cis.org.au
Robert Carling is a senior fellow at the Centre for Independent Studies.
He is available for comment.
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