“Just the Facts, Ma’am: “Testing” Keynesian Theory,” 29 April, 2013.The unrealistic assumption that he appears to be making in his criticisms of me is this: that real output and private investment must have started expanding immediately after the stimulus began.
“Believing Is Seeing, Part II,” 29 April.
But it is obvious that government spending takes time to induce changes in private investment.
Why should there be an immediate and instant movement? I know of no Keynesian economist who has ever thought that there should be instant effects on private investment from stimulus.
With reference to the graph of US private-sector investment Murphy posts, I do not find it surprising that private investment continued to contract in 2008 and early in 2009. The shocks to business confidence were very severe indeed in 2008: probably worse than in any other recession after 1945.
But private sector investment did turn around in mid-2009: after 6 months or so of stimulus spending, which stabilised demand for products. There is a clear trend of rising private sector investment with rising government spending for years after mid-2009.
If private sector investment had continued to contract for years after the stimulus, then Murphy would have empirical evidence to support his anti-Keynesian, Austrian case. But that is not what the data show.