Keynesian orthodoxy is flawed

Dr Richard Wellings writes for PublicServiceEurope

Faced with one of the worst recessions since the 1930s, many governments launched huge fiscal stimulus programmes. In the United States, for example, President Obama introduced an $800bon package of expanded unemployment benefits, increased welfare provision, tax incentives and various health, education and infrastructure projects.

Keynesian orthodoxy dominated the economic agenda and it was assumed that these stimulus policies would kick-start the recovery by replacing lower private spending with higher public spending and marshalling idle resources. A positive multiplier effect would operate, whereby the increased spending would circulate around the economy - increasing employment and boosting demand still further.

But the plans have failed in their heartland, America. Unemployment has continued to rise and economic recovery, if evident at all, has been anaemic. The disappointing outcomes of fiscal stimulus programmes come as no surprise to those economists, who argue they were flawed the outset. Perhaps, the most prominent critic is Robert J. Barro, Paul M. Warburg Professor of Economics at Harvard University, who delivered the Institute of Economic Affairs Annual Hayek Memorial Lecture in London, this week.

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