Barack Obama and Keynesian Economics Will Prevail


Before Barack Obama was sworn into office, the economy was in free fall. There was a raging debate among economists regarding the best way to put the economy on a path to recovery. Those economists who have been engaging in that fierce debate falls into two camps: saltwater economists and freshwater economists.  

Many saltwater economists have supported the notion of a big stimulus. Freshwater economists, on the other hand, have been skeptical, if not totally opposed, to such fiscal policy because of their fear that it would cause inflation and impede private investment rather than promoting economic growth.  

Although saltwater economists would have preferred a bigger stimulus program, the success of the stimulus bill in restoring economic growth has shown that the prediction made by many freshwater economists has come to naught. Hence, the evidence has shown that saltwater economists have won that economic debate.

Saltwater economists are so named because they teach at universities that are located in the coastal region of the country whereas freshwater economists are found in inland universities. The University of Chicago has been the main bastion of freshwater economists. For the past few decades, their economic ideas have dominated macroeconomics. They had collected a number of Nobel Prizes, which have allowed them to exert tremendous influence not only in the field of economics but on public policy.

Because of the Keynesian roots of saltwater economists, they are more open to the government playing a greater role in trying to shore up the economy. During the Depression, John Maynard Keynes whose book the General Theory of Employment, Interest and Money had laid out a concrete way out of the economic turmoil that had gripped the nation.  

Keynes argued that lack of demand was chiefly responsible for the economic slump that characterized the Great Depression. Thus, businesses, due to lack of demand for their goods and services, had curbed their investment. To jumpstart the economy, Keynes strongly advocated a more robust fiscal policy with more government spending as a key component. His ideas undergirded many of the New Deal policies, which consisted of large public expenditures that were implemented by President Franklin Roosevelt. Those policies had been credited with pulling the country out of the Depression.

Many saltwater economists have seen a parallel between the Great Depression and the Great Recession. To deal, therefore, with the economic downturn that occurred following the financial crisis and spur economic growth, they have made a strong case for the government to adopt the same policy prescription. Although the stimulus bill that President Obama signed into law was not as big as what they advocated, he did adopt the fiscal policy that saltwater economists have embraced

After the policies of President Obama started to take effect, the economy has created more than 4 million jobs. In fact, there would have been another 1.4 million jobs had the public sector continued to grow at a rate that was akin to that of President George W. Bush’s. At that pace, the unemployment rate would have been about one percentage point lower than what it is today. Equally important, jobs have been created for 29 consecutive months.

The record clearly shows that the argument put forward by saltwater economists -- Paul Krugman- Nobel Prize winner, Brad Delong, and Joseph Stiglitz among others -- have been proven right.  Even the eminent freshwater economist, John Cochrane, who was skeptical of the idea of stimulus in the beginning of the crisis, seems to have acknowledged the merit of such policy.