Mr. John Maynard Keynes was right

Anyone with an interest in economics is fully aware of Mr. John Maynard Keynes. Keynesian economic policy was dominant between 1945 and 1973 that lead to the great middle class expansion. But along came oil shocks and stag-flation during the 1970's and Keynes fell from grace. Milton Freidman's monetarism became the new focus for economic policy and it was good-bye middle class.

The 2008 global financial crisis brought Keynesian theory back in full force. A debate ensued about Keynesian policies and of course the usual suspects denied his relevancy. But looking back it is clear that Mr. Keynes is right.

Obama's 2009 Economic Recovery Act included state fiscal stimulus, safety net expansion, tax cuts and infrastructure investment. The graph above shows the effect of the Recovery Act on the deficit (left axis) and the annual change in real GDP and job growth (right axis).

Private demand fell off the cliff after the 2008 global financial crises. The Recovery Act, although way too small at $787 billion, brought real GDP and jobs back from the pits. But alas the Recovery Act stimulus ran out and political obstinacy ruled the day. So, it was back to austerity and deficit reduction way too soon. As a result the progress on jobs and growth began to fade.

The budget deficit has dramatically reduced since early 2011, but at the cost of jobs and growth in real GDP. The positive effect of Keynesian economic stimulus is clear from 1st quarter of 2009 to 1st quarter of 2011.



Graph: Bernstein, Jared; On the Economy