Keynesianism means using government spending to offset a recession, even if it results in a fiscal deficit. When the economy recovers, tax revenues should be then be used to rebalance the budget.
Google “Keynesian” and more than 4.2 million results pop up. It’s not quite the 220 million for “Kardashian” but not bad for the theories of a dead economist.
John Maynard Keynes (1883-1946), Cambridge don, luminary of the Bloomsbury Group, husband of a ballerina and a bon vivant who said his only regret in life would be not having drunk enough Champagne, might be amused.
Whether he would approve of all the uses and misuses and misunderstandings attached to his work today is another matter. But he wouldn’t be surprised, famously musing: “Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist.”
This particular defunct economist was the most influential of the 20th century.
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In its simplest form, Keynesianism means using government spending to offset a recession, even if it results in a fiscal deficit. When the economy recovers, tax revenues should then be used to rebalance the budget.
The first part, at least, was the principle that guided U.S. economic policy for decades, under Democratic and Republican presidents, including Ronald Reagan.
It has also been a flash point in the Great Recession.
Did President Obama “prime the pump” enough to offset the huge drop in demand? Keynesians, prominent among them Nobel laureate Paul Krugman, say no.
Conservatives influenced by Keynes critics, especially Friedrich Hayek and Milton Friedman, say it is misguided, counterproductive and even immoral to attempt a federal stimulus at all. The money is either misallocated or arrives too late and the result is crippling debt.
Writing recently in The Detroit News, professor Steven Horwitz of St. Lawrence University said Keynes’ “theories are behind the worst excesses of 21st century government spending.”
Lord Keynes isn’t around to defend himself or apply his brilliant intellect to our troubles. It may change few minds, but we ought to know the man in full. (Robert Skidelsky’s magisterial three-volume biography is well worth reading.)
Keynes was a conservative and a believer in capitalism. In addition to his scholarly achievements in mathematics and economics, he made a fortune speculating in commodities and currencies, and was chairman of a life-insurance company.
An official of the British treasury at the peace negotiations ending World War I, he was nearly alone in seeing how the punitive settlement would cause economic ruin and new conflict.
The other who did was Herbert Hoover, who advocated a magnanimous peace. Keynes said Hoover was the only one who “emerged from the ordeal of Paris with an enhanced reputation.”
Keynes made his reputation with the fierce book, “The Economic Consequences of the Peace.” Then he turned his energies to the tendency of capitalist economies to boom and bust.
The result was “The Treatise on Money” on the seesaw between savings and enterprise. Economist Robert Heilbroner writes, “Yet for all its masterful analysis, no soon than Keynes had written the Treatise than, figuratively, he tore it up.”
The reason: The Great Depression had hit and the world was faced with a depression that stayed. Unemployment was 25 percent in the United States. The market was not self-correcting. Savings shrank. The economy was paralyzed.
From this came Keynes’ heresy against neoclassical economics in his revolutionary book, “The General Theory of Employment, Interest and Money.”
There are unsettling parallels between the 1930s and today. Both were preceded by a speculative boom, laissez-faire, high accumulation of debt, great income inequality and fundamental changes in the structure of the economy.
The result was a deep, historic collapse.
But the differences are important, too, and not just that we’re not yet hurting as bad.
Government is large today and a substantial force in the economy, including in big military spending and subsidies for major industries. The economy is over-financialized, with dangerously hyper-complex banking and interconnected, politically powerful big banks.Thirty years of tax cuts have created a structural fiscal imbalance.
Unlike after the 1929 crash, today’s Federal Reserve acted robustly to stop deflation. The safety net put in place beginning in the Depression worked, albeit imperfectly. Also, unlike the 1930s, China is a powerful and rising nation.
And, yes, a stimulus was enacted in the depths of the Great Recession. Any administration would have done it. It helped, though now is receding.
Thus Friedman in 1965: “In one sense, we are all Keynesians now; in another, nobody is any longer a Keynesian.”
For example, Keynes himself would have been appalled at the debt the government was carrying even before the Great Recession.
And the reality is that although the New Deal, amid all sorts of improvisation good and bad, applied some Keynesian stimulus, it was never enough to beat the Depression totally. It did, importantly, provide infrastructure and jobs and ease suffering.
Keynes himself conceded, “It is a mistake to think that (businessmen) are more immoral than politicians. If you work them into (a) surly, obstinate, terrified mood, the nation’s burdens will not get carried to market; and in the end public opinion will veer their way.”
So while Keynes lit a way, showing that a balanced budget and thrift do not resuscitate a severely depressed economy, in some respects we’re on our own.
Best to remember, however, that Keynes was never the prisoner of an ideology. Confronted by an angry man pointing out an inconsistency in his positions over time, Keynes responded, “When the facts change, I change my mind. What do you do, sir?”
You may reach Jon Talton at email@example.com.