A Keynesian disaster in America. Christopher Caldwell reports on the success of Merkel’s Germany and the collapse of the Keynes cult on the Continent:
Germany’s growth in this year’s second quarter was 2.2 percent on a quarter-to-quarter basis. That means it is growing at almost 9 percent a year. Its unemployment rate has fallen to 7.5 percent, below what it was at the start of the global financial crisis — indeed, the lowest in 18 years. The second-biggest Western economy appears to be handling this deep recession much more effectively than the biggest — and emerging from it much earlier.
The Harvard economist Alberto Alesina and his colleague Silvia Ardagna published an influential paper last fall in which they surveyed all the major fiscal adjustments in OECD countries between 1970 and 2007 and showed that tax cuts are more likely to increase growth than spending hikes. One of their most controversial findings — which comes from the work of two other Italian economists — is that cutting deficits can be expansionary, particularly if it is done through “large, decisive” government spending cuts, as it was in Ireland and Denmark in the 1980s. More generally, Alesina has argued that “monomaniacal” Keynesians have focused unduly on aggregate demand.