The $700 billion economic stimulus package signed into law by President Obama earlier in 2009 has had minimal impact on the US economy. Evidently, it has neither saved nor created the number of jobs promised by his top economic advisors, Larry Summers and Christina Romer. With the numbers now in, both they and Obama are backing away from earlier projections and relying on 2010 to bail out their bail outs. The Fed has already intimated that they are retreating into false consciousness. The tragedy for US taxpayers is that Summers and Romer knew from the outset that their projections were false. For, until hired by Obama, both were New Keynesians, not Old-Keynesians. The difference is really important. For the New Keynesians recognize rational expectations as the basis for understanding the macroeconomy.
Under rational expectations stimulus injections by the government are largely anticipated and neutralized by other agents in the system – consumers who reduce expenditures elsewhere, firms who reduce investments – in anticipation of increasing government expenditures. Only rigidities in the system such as staggered wage renegotiations and inflexible prices, allow any fiscal stimulus at all. Summers and Romer helped to write that literature.
Of course, economists who enter into government are no longer professional economists. A famous Chicago and London School of Economics economist, Harry Gordon Johnson warned all his students both in the US and the UK that if they entered government, even for one week, he would never again write a reference for them for any position as a professional economist.
Summers and Romer now serve political masters such as Obama who are motivated by votes and money, not by economics. They have both sold out their discipline for their thirty pieces of silver. Sadly, they have truly sold out, not themselves, but the taxpayer-voters who unwisely trusted them. If rational expectations is truly relevant, they will not be able to sell out those people out a second time. If Obama wants a second stimulus, he will need to fire those advisors and try a new team. That should prove to be no problem since Paul Krugman and Joe Stiglitz and others no doubt will be more than willing to take their place.
When the third time comes around, however, some time in 2011, no one will believe any economics team that Obama hires. The massive fist of free market ideas once again will smash through the false consciousness of Keynesian dreams, and voters will rush to elect leaders such as Margaret Thatcher and Ronald Reagan, capable of undoing some of the terrible economic harm that has been heaped upon them.