Disconnect between economic theory and reality seems ominous

"The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. ... Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist."

—John Maynard Keynes(1883-1946), English economist

WASHINGTON — Almost everyone wants the world's governments to do more to revive ailing economies. No one wants a "double dip" recession. The G-20 Summit in Toronto was determined to avoid one. In major advanced countries — the 31 members of the Organization for Economic Cooperation and Development — unemployment now stands at 46 million, up about 50 percent since 2007. It's not just that people lack work. Lengthy unemployment may erode skills, leading to downward mobility or permanent joblessness. But what more can governments do? It's unclear.

We may be reaching the limits of economics. As Keynes noted, political leaders are hostage to the ideas of economists — living and dead — and economists increasingly disagree about what to do. Granted, the initial response to the crisis (sharp cuts in interest rates, bank bailouts, stimulus spending) probably averted a depression. But the crisis has also battered the logic of all major economic theories: Keynesianism, monetarism and "rational expectations." The resulting intellectual chaos provides context for today's policy disputes at home and abroad.

Consider the matter of budgets. Would bigger deficits stimulate the economy and create jobs, as standard Keynesianism suggests? Or do exploding government debts threaten another financial crisis?

The Keynesian logic seems airtight. If consumer and business spending is weak, government raises demand through tax cuts or spending increases. But in practice, governments' high debts impose financial and psychological limits. The ratio of government debt to the economy (gross domestic product) is 92 percent for France, 82 percent for Germany and 83 percent for Britain, reports the Bank for International Settlements in Switzerland.

This means that the benefits of higher deficits can be lost in many ways: through higher interest rates if greater debt frightens investors; through declines in private spending if consumers and businesses lose confidence in governments' ability to control budgets; and through a banking crisis if bank capital — which consists heavily of government bonds — declines in value. There's a tug of war between the stimulus of bigger deficits and the fears inspired by bigger deficits.