Common Fallacies about Macroeconomics

As the recession has deepened and the financial debacle has passed from one flare-up to another during the past year and a half, commentary on the economy’s troubles has swelled tremendously...

The bulk of it has been bad for the same reasons. Most of the people who purport to possess expertise about the economy rely on a common set of presuppositions and modes of thinking. I call this pseudointellectual mishmash “vulgar Keynesianism.” It’s the same claptrap that has passed for economic wisdom in this country for more than fifty years and seems to have originated in the first edition of Paul Samuelson’s Economics...

Vulgar Keynesians are nothing if not policy activists...The eras they esteem as the most glorious ones in U.S. politicoeconomic history are Roosevelt’s first term as president and Lyndon B. Johnson’s first few years in the presidency. In these periods, we witnessed an outpouring of new government measures to spend, tax, regulate, subsidize, and generally create economic mischief on an extraordinary scale. The Obama administration’s ambitious plans for government action on many fronts fill vulgar Keynesians with hope that a third such Great Leap Forward has now begun.

The vulgar Keynesian does not understand that extreme policy activism may work against economic prosperity by creating what I call “regime uncertainty,” a pervasive uncertainty about the very nature of the impending economic order, especially about how the government will treat private-property rights in the future.

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