Another Look at Keynesianism and the Great Stagnation

by Mike Kimel

Another Look at Keynesianism and the Great Stagnation

Cross-posted at the Presimetrics blog

Last week I had a post noting that the US government followed more or less naive Keynesian policies (whether on purpose or not I cannot say) from the early 1930s to the late 1960s. The post also notes that what Tyler Cowen calls The Great Stagnation, a period of relatively slow economic growth, began just about when the government moved from naive Keynesian policies to a regime that could mostly be described as “all deficits all the time.”

In this post, I’d like to present a couple of graphs that are pretty self-explanatory. The data in the graphs comes from the BEA’s NIPA Table 1.1.5 The black line runs from 1929 to 1967, and the gray line from 1968 to the present.

Figure 1

Figure 2

I’ll be coming back to this topic in future posts, but I’d like to make a few quick comments:

1. The Great Stagnation Tyler Cowen comments on seems to, at a minimum, coincide very strongly with the period where the government quit Keynesian policy, where the private sector’s share of the economy stopped shrinking and began growing, and where the government’s role in the economy stopped growing and started shrinking.

2.  Even if you assume the growth of the private sector or the shrinking of the government isn’t causing or contributing to the Great Stagnation, the data still leaves libertarian and conservative economic views at a loss.  After all – shouldn’t growth increase as the private sector becomes more important and the government shrinks in size? 

3.  Bear in mind that marginal tax rates – reduced in 1964 and then reduced again multiple times since then – were lower during the Great Stagnation period than they had been since the 1930s.  Needless to say, this is yet another fact that makes the data inconsistent with libertarian and conservative economic theory.

4.  As always, if you want my spreadsheet, drop me a line. I’m at my first name (mike) period my last name (one m only in my last name!!!) at gmail period com. And don’t forget which post your writing about.

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