Why American Keynesians Are Right and the Rest of the World is Wrong

Only the United States Has an Economy Higher Than it Was Five Years Ago

Paul Krugman of the New York Times points us to a brief commentary in The Economist which illustrates economic progress or lack thereof since the fourth quarter of 2007.

WE ARE now in the middle of the fourth quarter of 2012. That means that it has been five full years since the American economy first tipped into recession amid a gathering financial storm. How have we done since that time?

Okay, that is an easy question to answer, since economic data unlike politics cannot be spun.  Numbers can not be denied.

 Five years later, only America has surpassed its pre-recession output. For now, it appears to be on a steady, if disappointing, growth trajectory. Japan had the worst recession of the bunch but rebounded quickly. It has since struggled amid seismic disasters and various China troubles. Britain and the euro area have until recently followed very similar trajectories, but British output turned up nicely in the third quarter while the euro area officially re-entered recession.

The data of course confirms what Mr. Krugman and others have been saying, that a recession that combines a financial institutions breakdown, a bursting of an asset bubble and a traditional collapse of aggregate demand will take a long time to recover from.

It also confirms that just believing that austerity will bring economic growth is not sufficient to bring economic growth.  Economic growth results from traditional Keynesian economic policies, in short the type enacted by the Obama administration.

This is not to say that the Obama economic policy gets anything better than a C+.  It was insufficient and poorly designed. But what the above chart does say is that maybe given the political constraints and lack of economic knowledge on the part of the President and others this was the best that could have been done.  It is certainly better than what would have taken place under Republicans, whose policy prescriptions were much closer to those put in place in Europe and whose results would then have been very close to the ones in Europe.

America has dodged an economic bullet by electing Mr. Obama and by re-electing him.  But Republicans want to try to fire the austerity gun again, and this time if they get the shot off it may go right through the heart of the recovery. Everyone will be wounded unless the President takes the firm stand he should have taken last time around. (Note the shooting metaphor as a tribute to the opening in these parts of deer murdering season.)