Jonathan Chait

Keynesianism Does Not Mean Profligacy


Henry Farrell and John Quiggan make a pretty fundamental point about Keynesian economics -- it's not a mandate for larger government or larger deficits in general:

Contrary to the beliefs of nearly all anti-Keynesians—and, regrettably, some Keynesians, too—Keynesianism demands more, not less, fiscal rectitude in normal times than does the orthodox theory of balanced budgets that underpins the EU. John Maynard Keynes argued that surpluses should be accumulated during good years so that they could be spent to stimulate demand during bad ones. This lesson was well understood during the golden age of Keynesian social democracy, after World War II, when, aided by moderate inflation, the governments of the countries in the Organization for Economic Cooperation and Development greatly reduced their ratios of public debt to GDP. This approach should not be confused with the opportunistic support for large budget deficits evident, for example, among advocates of supply-side economics. If anything, “hard” Keynesianism suggests that the problem with the macroeconomic rules governing the euro is not that they are too tough and too detailed but that they are not tough or detailed enough. States in the eurozone should not be allowed to run moderate budget deficits in boom years, the Keynesian argument goes; instead, they should be compelled to run budget surpluses. The surpluses could then be saved in rainy-day funds or used to pay down government debt or, if the country had reached a satisfactory debt-to-GDP ratio, spent as a fiscal stimulus in the event of a crisis. Unlike the kind of budget management advocated by the German government, this approach does not seek to eliminate or minimize governments’ leeway to conduct fiscal policy. It gives governments up-front the means to manage demand whenever they might need to.

A kind of vulgar Keynesianism among some liberals asserts that deficit spending is always appropriate. I ran into that view when I published a piece for the American Prospect in 1999 defending the Clinton administration's policy of maintaining surpluses at the height of the 1990s boom. The most "Keynesian" liberals opposed this policy, but in fact it was perfectly consistent with Keynesian philosophy. By the same token, President Obama's alleged policy of ultra-leftwing big government is really just the same economic theory as that used by Clinton, applied under opposite conditions. Here's how I addressed the objection from the left, which was quite widespread, that Clinton's policies enshrined extreme fiscal conservatism:

But doesn't all this talk of running surpluses play into a puritanical fear of deficits and reinforce the simplistic notion that budgets must be balanced all the time? Actually, it is just as likely to have the opposite effect. The conservative insistence that the budget deficit be zero every single year is a fetishization of an economically meaningless number. It used to be an excuse for mindless budget slashing, and now that there is a surplus, it has become an excuse for mindless profligacy—any surplus is an "overcharge," say Republicans, that must be dissipated immediately. Contrarily, the proposition that we should save money during prosperous times inherently presupposes that we can spend the money when we need it. As Treasury Secretary Larry Summers has put it, "The time to reload the fiscal cannon is now." The point of loading a cannon, of course, is to have the ability to fire it.

The Republican fetishization of balanced budgets remains as mindless as ever. It's a policy that demands pro-cyclical fiscal policy -- when the economy booms and the deficit shrinks, you must cut taxes to overheat the boom even more, and during recessions you must pull back, deepening the crisis further.

I do think my article got one big thing very wrong. It failed to account for the possibility that Republicans would take control of the budget and wreck the carefully constructed bulwarks of fiscal responsibility that Clinton had built. Indeed, the surplus provided George W. Bush with a rationale for passing large tax cuts financed by a disappearing surplus. If Clinton had dissipated the surplus on his terms, Bush would have had less running room of his own.

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