Tuesday, January 06, 2009

Why I think that the President of the C.D. Howe Institute is wrong

C.D. Howe Institute president William Robson thinks that the experience of Japan since the early 1990s confirms his view that Keynesian ideas are of limited usefulness, even under current conditions. (See "We Are All Keynesians Now? No", Globe and Mail Dec. 30, 2008).

Funny, the most recent winner of the Nobel Prize in Economics, Paul Krugman, completely disagrees. Here is how Krugman interprets the same evidence: “Short-term interest rates were close to zero, long-term rates were at historical lows, yet private investment spending remained insufficient to bring the economy out of deflation. In that environment, monetary policy was just as ineffective as Keynes described. ...And when the Bank of Japan found itself impotent, the government of Japan turned to large public works projects to prop up demand. ...[D]epression-like conditions might well have returned without the guidance of Keynesian economics.”

I suppose that Mr. Robson, a practical man, is himself a slave to some defunct economist---Milton Friedman, perhaps?

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