In December 2008, the then German Finance Minister, Peer Steinbrück, injected a new phrase into macroeconomic debate — "crass Keynesianism". In a Newsweek interview, he warned of the risk of "burning money without significant effects and in the end having a budget weighed down with even more debt". 

Steinbrück's most egregious target was Gordon Brown, who was in the final phase of an almost decade-long public-spending binge. But his wider assault was on an idea devoutly held in nearly all US and British university economics departments. This was the notion, first propounded by Keynes in his 1936 General Theory, that increases in government expenditure and the resulting budget deficits stimulate economic activity. 

The American Keynesians retaliated. In the New York Times, Paul Krugman invoked Keynes's claim that a so-called "injection" of public expenditure raises aggregate demand by a multiple of itself. The Nobel laureate thought that "a huge multiplier effect" was indeed at work, but "unfortunately what it's doing is multiplying the impact of the current German government's boneheadness". 

Krugman had, and retains, much influence over Barack Obama. Within a few weeks of Steinbrück's verbal offensive, the newly-elected President Obama signed the American Recovery and Reinvestment Act. According to the latest Economic Report to the President, this was "the signature element in the Administration's policy response to the crisis". The "cost" was estimated at $787 billion and described as "the largest countercyclical fiscal action in American history". 

It is now more than 18 months since the Steinbrück-Krugman exchange, a period usually regarded as long enough for fiscal measures to have an impact. So who's been right? The critical variable is the unemployment rate. The Economic Report is right that the current burst of additional public expenditure is unprecedented. The increase in the structural budget deficit between 2007 and 2010 was six per cent of gross domestic product, far in excess of anything seen in the 1930s or in the early 1980s, which saw the previous big post-1945 recession. If a fiscal boost of six per cent of GDP, along with the alleged "multiplier" effects, has been unable to cut American unemployment, something is wrong with Keynesian theory.