Goodness Gracious no. The History of that theory is atrocious.
Allow me to present a counternarrative.
cpwill said:
1920: Stock Market Collapse, Unemployment Spikes. Government Response: Cut Spending Reduce Taxes. Effect: Rapid Economic Growth, Unemployment drops to historically low levels.
If you're referring to Hoover's response, this just isn't the case. The stock market crashed in 1929, and Hoover was president until 1933. Over that time period, the United States' GNP (I guess they didn't measure GDP back then) declined by -9.4% in 1930, -8.5% in 1931, -13.4% in 1932, and -2.1% in 1933. Unemployment rose from 3.2% in 1929, to 8.7% in 1930, to 15.9% in 1931, to 23.6% in 1932, to 24.9% in 1933.
FDR became president and began the New Deal in March 1933. The economy bottomed out in June 1933, and then started growing.
cpwill said:
1930: Stock Market Collapse, Unemployment Spikes. Government Response: Raise Spending Raise Taxes. Effect: Unemployment spikes higher, the economy shrinks for four straight years, a decade of double-digit unemployment. Market does not recover until 1953.
The economy began growing almost immediately after the New Deal began. In FDR's first term, the economy shrank by -2.1% in 1933, then grew by 7.7% in 1934, 8.1% in 1935, and 14.1% in 1936. Over the same time frame, unemployment fell from 24.9% to 16.9%.
In his second term, the economy didn't do as well. But does this show the failings of Keynesian economics? Hardly. In fact, it's because FDR briefly turned conservative in 1936-1937 and pursued contractive fiscal and monetary policies! The economy grew by only 5.0% in 1937, shrank by -4.5% in 1938, before resuming growth of 7.9% in 1939.
I don't see how anyone could conclude from the events of the Great Depression that Keynesian economics was a failure. The economy grew every single year that FDR was president except two: 1933 (which we can give him a pass on since it was his first year in office), and 1938 (which was during a brief recession following a brief return to contracting the money supply). And most of the years that the economy grew, it did so by huge margins that would thrill any economist if they were to be replicated today.
Timeline of the Great Depression
cpwill said:
Late 1940's: Extremely High Inflation threatens, as does the loss from the necessary massive restructuring from a war to a peace economy. Government Response: Drastically Slash Government Spending. Effect: Unemployment stays at historically low levels, economic growth accelerates.
WORTH NOTING: this is the single best example of the utter failure of keynesian economics. Keynesians were UNANIMOUS that the reduction in government spending combined with the demobilization of the military would result in mass unemployment. The Government reduced spending by 40%. Millions of men left government service.
and yet 1946 was the single best year for the private economy in United States History. Production shot up a mind-boggling 30%. AG Hines was predicting we would collapse back into the Great Depression - Unemployment predictions from Keynesians across the country ranged between 6 and 10 million men out of work by winter of 1946.... yet unemployment stayed below 4%.
Unfortunately I don't have any statistics on 1946 that I can find (my Depression statistics end in 1945, and my modern statistics start in 1947). But it DOES look like the economy was in recession in 1947, albeit a mild one. Real GDP shrank by -1.4% in 1947 Q2, -1.5% in Q3, and 0.0% in Q4. Those are the earliest statistics I have, so I'm not sure what the economy was doing prior to that. But it's not unreasonable that a massive decline in government spending would take a year or so to show up in the economic statistics. Unemployment is usually a lagging indicator.
GDP Growth Rate (Recent History)
cpwill said:
After the repeated failures of the 1930's (which they blamed on 'greed'), the Keynesians put themselves out into a major falsifiable position on a prediction that - if their assumptions were correct - could not possibly fail..... and were 100% completely utterly humiliatingly hilariously wrong.
There are always other factors in determining economic growth besides monetary/fiscal policy. People who claimed otherwise were guilty of oversimplifying it. But that doesn't change the fact that the economy will respond to fiscal and monetary stimuli in roughly predictable ways. That doesn't always mean that a loose monetary policy is going to grow the economy, but it does mean that a loose monetary policy will usually result in quicker growth than a tight monetary policy would have.
cpwill said:
Late 1960's: Undaunted by their failure, Keynesians claim that the growth of the 50's and early 60's prove that they have now mastered the business cycle - there will never again need be a recession in the United States of America because they have the power to fine-tune them out via the power of Government expenditures. Arthur Okun (Chairman of the Council of Economic Advisers to the President) wrote an entire book about how recessions were no longer "necessary" and that booms could now be perpetual thanks to the magic of Keynesianism. Result: one month after the book is published, the US goes into recession. Keynesians attempt to bring their brilliance to bear - Result: the 1970s and stagflation. CPI rose about 160% from 1965 to 1980. Unemployment rose and remained high. Inflation-adjusted, the DOW fell fully 80% from it's peak (put that in perspective - the giant market crash that we just went through was smaller).
I'm not sure what year you're referring to; the US economy was never in recession in the late 1960s. It looks like it may have undergone a brief contraction (although not a recession) in Q4 of 1970, when the real GDP shrank by -0.2%.
As for the stagflation of the late 1970s, this is probably the example of where Keynesian economics worked the least well...although even here, a lot of the problems were DESPITE Keynesian economics rather than BECAUSE of it. Monetary policy in the 1970s was actually much tighter than it had been in the 1960s (i.e. the federal funds interest rate was higher). Not as tight as it probably should have been, but nevertheless not profligate. Similarly, fiscal policy in the 1970s - although not great - was not particularly profligate. Our debt-to-GDP ratio actually declined slightly during the 1970s.
http://www.usgovernmentspending.com/federal_debt_chart.html
The biggest causes of stagflation were policy-related. Excessive regulations and price controls laid by Nixon, Ford, and Carter pushed unemployment up. Severe oil shocks pushed inflation up. Economists, faced with both high unemployment and high inflation for the first time in history, were divided over which was worse. Unfortunately, they picked wrong and tried to get unemployment under control. This led to a wage-price spiral.
And it's also worth noting that stagflation ended by an extremely massive influx of Keynesian monetary policy. The Fed chairman, Paul Volcker, pushed interest rates sky-high to get inflation under control, deliberately creating the recession of 1981-1982. He recognized that the economy could never be healthy as long as high inflation remained a problem.
cpwill said:
STAGFLATION: under Keynesianism, of course, is
impossible. They had never considered the possibility that it could happen - because their assumptions mean that it can't. Inflation is supposed to improve employment by reducing real wages which remain sticky in inflated dollars, and more money means more growth.... so stagflation can't happen.... and the fact that it does.... well, just ignore the fact that it does, because otherwise the model doesn't work.
Again, there are always other economic variables in play. At any given level of inflation and any given level of fiscal/monetary profligacy, you can have high or low unemployment depending on other economic factors. It's true that unemployment is USUALLY negatively correlated with inflation, but this isn't always true.
cpwill said:
2001 - Paul Krugman writes about the need to lower interest rates in order to stimulate housing. Bush tells us how we can avoid a recession by jump-starting the economy in 2008. Obama tells us we can keep unemployment below 8% in 2009. Obama tells us that unemployment will peak at around 9% if we don't pas the stimulus.
But low interest rates during the 2000s was not a Keynesian approach (except during the 2001-02 recession). Alan Greenspan is hardly a Keynesian; he's a monetarist and his biggest influences include Milton Friedman and Ayn Rand. A Keynesian approach would have been to RAISE interest rates significantly in 2003-04, and keep them high until the economy slowed down again.
As for how Keynesianism will play out in the current economic climate, it's hard to say for now. It'll be easier to tell in ten years. But the history of Keynesianism has been one of success.