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In Which I Would Sign Up to Be a Keynesian
February 8, 2010 Macroeconomics

If you take the classical Keynesian interpretation of the role of government in the economy and compare it to what a “true” Keynesian ought to advocate for based upon a careful reading of Keynes’ work, you might find yourself a little confused.

The classic Keynesian argument is that the government can play an important role in stimulating the economy in times of slack demand, for whatever reason the slack in demand happens. Thus, when the economy enters a recessionary period there is a reason for government to reduce taxes, increase spending or both as a way to get the economy back onto its long run steady state rate of growth path. While I do not subscribe to this theory, let’s just accept it. However, the classic Keynesian argument then is for a temporary increase in government spending. When economic activity recovers in fact the extra spending should be eliminated.

As a corollary, if the economic is in a stage of “excessive” expansion (again assuming that the all knowing people in DC know that it is expansion and excessive) the same Keynesian argument that supports government spending increases to heat up an economy, should also call for government spending decreases as a way to get the economy down to a steady state rate of growth. In other words, if the point of government management of the economy is to smooth economy fluctuations and minimize dislocations – then Keynesian economics ought to apply on both sides of the business cycle.

OK, now you are laughing because you know that only one half of this argument is used in practice. When the economy is entering or is in a recessionary period, the Keynesians all seem to crawl out from under their rocks to advocate for all manner of government stimulus spending – despite the serious arguments of opponents claiming that these will do no good – or even if they would theoretically do good, that the timing would be too late, or the spending too abused by the political process so as to negate any possible benefits we could have gotten from the stimulus. To heck with that – we end up pursuing ineffective Keynesian stimulus every time we are in a recession. But how come these guys (and gals) don’t scream from the rooftops when GDP is growing at over 3% per year and when unemployment is at 5% that the government needs to dramatically scale down the scope of its activities in order to prevent the economy from overheating? In fact, the arguments should also run the same way – in order to prevent the worst crash since 1929, the government should stop spending money – otherwise, the irrational market will over-invest and over-invest until we have no choice but to crash. The answer is obvious – one way to put a halt on activity in boom times is to raise taxes and increase regulation – something the government might have a small interest in promoting. But note however that these tax and regulatory increases would also have to be temporary. If you want to advocate for soaking the rich plans and giving more power to the FDA and the Consumer Product Safety Administration in order to cool down the market, then it follows that these tax increases and regulatory authorities ought to be withdrawn as the downturn comes again. By now, you are choking on your food laughing that I even suggest this is a possibility.

Of course, we do not see the Keynesians argue this way. If American voters and the economists that promote Keynesian policies were seriously wedded to the true Keynesian view – then there would be a long period of time that they would have to support dramatic reductions in the size and scope of government. After all, the typical recession lasts well less than 2 years, and the typical expansion lasts well more than 5 years. So, the reason for all of this actual Keynesian policy prescription has nothing to do with economics and everything to do with expanding the role of the state – and the influence of those economists that can be relied upon to come to the rescue whenever and wherever there might be a crisis on the way. If the Keynesians were serious, they would advocate for the production of a robot that runs an automatic stabilization program to run counter-cyclical fiscal policy. But of course, we know that know statist is ever willing to give up on the enormous discretion to control over 50% of the economy.

If the Keynesians were true to their doctrine, I might even sign up for it given that I am not sanguine at all at the prospects of ever moving seriously in the direction of smaller government and more freedom any time during my lifetime.

"1" Comment
  1. I defer to your understanding of Keynes, Perfesser. I’ve read segments of the original, but enough analysis of his work to think your critique of so-called Keynseans makes complete sense, and you make a great point. Folks such as Paul Krugman and Laura Tyson appeal to the authority of Keynes whenever it suits their purpose of taking property from some people and distributing it to other people according to their ideas about justice.

    In many respects, these days remind me of 1979, and I would argue that we don’t have the worst recession since the days of the Great Depression, but rather since the days of Jimmy Carter. I know the parallels are not exactly the same: for example, bond yields do not yet reflect the inflation we have experienced, and will experience.

    I do remember taxes being cut (in three phases according to the wisdom of Dave Stockman), the price of oil falling, and, in 1982, perhaps the brightest investment outlook I can remember in my life.

    I remember federal revenues rising, Congress consuming the taxes and then some. I remember Anne Gorsuch, Reagan’s EPA administrator being eviscerated for her attempts to diminish the powers of her domain. But in those days Robert Bartley was on the top of his game: he was proved right, and ever since folks like Paul Krugman and Laura Tyson have been sore. The first thing out of Ms Tyson’s mouth (as Clinton’s CEA chief) was “stimulus” and the first thing out of her mouth after Obama was elected was “stimulus,”
    meaning just like Jimmy Carter, we should drop hundred-dollar bills out of airplanes, only this time there should be more tons, this time dropped correctly, using GPS, over defaulting mortgagees who live in favored precincts. Paul Krugman says the last $800 billion airlift was not enough.

    Your real question is whether all this is just two steps forward, one step back. I don’t think “the Keynseans” will change their minds this late in their careers, but I smell rebellion out there, especially since many have figured out what these grand plans will cost them. Remember, Bastiat didn’t have a blog.

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