Monday, February 18, 2013

Another Keynesian Dogma Demystified

Confirmation bias is widespread in social sciences, and economics has plenty of it, as the dogmatic, pro-state and self-interested defense of Keynesian multipliers exemplify so well. Garett Jones gives a good example of research that demolishes prevalent misconceptions:
One problem with estimating the effect of government purchases on the short-run economy is that government spending is responding to the economy in real time: government dollars aren't dropped in randomly, like in a lab experiment. ... It could make government spending look better than it really is: maybe governments are more likely to go on a spending spree when a free-market recovery is "just around the corner" all on its own. ...
The conventional Keynesian (and New Keynesian) story has been that government spending should get more bang for the buck--a bigger multiplier effect--when the spending happens during a deep recession.  A new paper by Owyang, Ramey, Zubairy uses news about changes in future military spending as a kind of natural experiment* to test this idea: [W]e find no evidence that multipliers are greater during periods of high unemployment in the U.S.

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