Monday, December 03, 2012

A Keynesian Cliff

When we have a recession and there's a call for stimulus, a lot of people - especially on the right - dispute the effectiveness of Keynesian economics. People like Prime Minister Harper and Finance Minister Jim Flaherty were so ideologically committed to small government that as we entered recession in 2008 they tried to cut spending... resulting in a threatened coalition and subsequent prorogation, with crisis averted only when Harper gave in to opposition demands to enact a stimulus package.

Throughout this recent recession, many on the right argued that deficit-cutting must be the priority. They didn't care that the IMF and central bank governors were calling in the strongest terms for stimulus. They disputed claims that stimulus causes the economy to grow, which reduces the deficit. They just wanted to cut.

Now we're facing the so-called fiscal cliff (Paul Krugman prefers the term "austerity bomb"): taxes will rise and spending will be cut on January 1 unless Obama and Congress can come to an agreement to stop it. The fiscal cliff is pure Keynesian economics: raising taxes and cutting spending will slow down the economy. But when it comes to the fiscal cliff, Keynesianism is suddenly acceptable. The same Stephen Harper who wanted to cut spending in 2008 is out giving speeches about the dangers of the fiscal cliff.

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