I take issue with O’Driscoll’s analysis, as follows:
(1) O’Driscoll states that “all efforts to stimulate the economy with monetary and/or fiscal policy have failed.” What does he think happened in 2009 when the US rapidly emerged from one of the most severe recession in decades with fiscal stimulus? One can see here how the GDP contraction was reversed by Q3 2009:
Of course, there certainly has been a failure of fiscal policy: it has not been large enough. Current fiscal policy, while insufficient to stimulate the economy back to full employment, is nevertheless keeping the economy on life support, and preventing a severe debt deflationary recession/depression.
(2) It is true that quantitative easing has failed to significantly stimulate aggregate demand. However, that is what any good Keynesian would tell you anyway: monetary policy is a feeble tool for aggregate demand expansion, especially when you are mired in a diseased economy with excessive private debt, barely staving off outright debt deflationary collapse. We currently in a “lost decade,” much like Japan in the 1990s. Japan also gives us a stark lesson in what not to do: in 1996–1997, the Japanese Prime Minister Ryutaro Hashimoto turned to contractionary fiscal policy and austerity, including personal income and national sales tax increases. This plunged Japan back into recession and the lost decade persisted until the early 2000s. That is what the advocates of fiscal austerity would inflict on America and Europe.
(3) O’Driscoll appears to subscribe to the nonsense idea of “crowding out” in current circumstances. This is similar to the absurd New Classical idea of Ricardian equivalence, which I have debunked here.
Davidson, P. 1989. “The Economics of Ignorance or Ignorance of Economics?,” Critical Review 3.3/4: 467–487.
Davidson, P. 1993. “Austrians and Post Keynesians on Economic Reality: Rejoinder to Critics,” Critical Review 7.2/3: 423–444.
O’Driscoll, G. P. and M. J. Rizzo, 1996 . The Economics of Time and Ignorance (2nd edn), Routledge, Oxford, UK.