Economic theory is perfectly acceptable. But in the real world, economic reality is much more important.
Yet in a recent Associated Press news story, reporter Charles Babington seems to have confused theory with reality. After noting that most of the GOP candidates are pressing for lower taxes and less regulation, Babington clucks that these steps aren’t likely to work. “Mainstream economic theory says governments can spur demand, at least somewhat, through stimulus spending,” he wrote. “The Republican candidates, however, have labeled President Barack Obam’s 2009 stimulus efforts a failure.”
Let’s consider Babington’s assertion.
It’s certainly true that “mainstream economists” think government can stimulate demand. That’s a perfect description of Keynesian economics. But there’s no need to turn to economic theory to see what the 2009 “stimulus” bill has wrought. In the real world, the 2009 stimulus efforts are a failure.
Recall that Congress spent almost $800 billion, much of it on supposedly “shovel ready” projects that were supposedly going to produce jobs. Before they went to work at the White House, two “mainstream economists” predicted that the bill would keep unemployment to less than 8 percent. They also predicted that the measure would create even more jobs in 2010 and 2011.
Instead, the unemployment rate climbed steadily throughout 2009, reaching 10.1 percent by October. It remained higher than 9.5 percent throughout 2010, and hovers at 9.1 percent today. Economic theory was all well and good, but economic reality is what matters to those who can’t find work.
As Daniel Mitchell, a less-mainstream but still prominent economist at the CATO Institute, writes, “the problem with Keynesianism is that it fails the empirical test. The Keynesians may be good at constructing models, but that doesn’t mean much if the models don’t match the reall world.” And they don’t.