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We are all faithful Keynesians now

August 17, 2011|By TOM FIREY

Keynesianism, the idea that government can heal the economy through reckless deficit spending, is an economic theory and, as such, subject to real-world testing. But Keynesianism is also a faith — faith is “evidence of things not seen,” after all, and America has never seen deficit spending create an economic recovery. Not for lack of trying: The United States has thrown mountains of money at the 13 recessions since John Maynard Keynes’ “General Theory” first appeared in print 75 years ago.

Nonetheless, the Keynesian faith is alive and well. It can be seen in the new debt deal, as well as the reactions to it by pundits who, as good fundamentalists, have condemned the deal for making only a moderate commitment to the creed.

To be charitable to Keynes, there is much more — and much of value — to the “General Theory” than government spending. But spending is the object of devotion for the Keynesian faithful, who believe that “fiscal stimulus” — their preferred term for reckless spending — is the one and only salvation for a failing economy. The problem is, fiscal stimulus has never done much besides run up public debt.

It did little to help the nation out of the Great Depression; instead, recovery was fueled by enormous increases in U.S. and foreign money supplies.  It also did little to end the many U.S. recessions after the Depression; again, monetary expansion rekindled growth. It hasn’t worked in Japan, where scads of “public investments” have failed to halt the nation’s “Lost Decade” (now entering its third decade).  

And it clearly hasn’t worked in the Great Recession, despite over $1 trillion in fiscal stimulus from the 2008 Economic Stimulus Act, the 2009 American Recovery and Reinvestment Act, the December 2010 taxes-and-spending deal and all the mini-stimulus bills along the way, on top of routine government deficit-spending. Despite all that, in this summer after what was supposed to be “Recovery Summer,” we have unemployment over 9 percent, underemployment over 16 percent, shrinking wages and growing fears of a “double dip” recession. That’s all quite different from the 6.5 percent unemployment and thriving economy that Keynesians promised us in 2009.

And yet, despite fiscal stimulus’ dismal track record, the supposedly miserly new federal debt deal will throw almost $1.1 trillion in deficit spending at the economy next fiscal year. That will be just the third trillion-dollar deficit in the nation’s history — and the third in a row. The allegedly draconian debt deal will cut next year’s federal spending by all of two-thirds of 1 percent below what President Obama wanted.

Truly, we’re all faithful Keynesians now.

But we’re not devout-enough Keynesians, according to the zealous. Slate writer Jacob Weisberg branded proponents of the debt deal “intellectual primitives” for not wanting even more stimulus. “Our enemies could not have designed a better plan to weaken the American economy than this debt-ceiling deal,” fumed New York Times columnist Joe Nocera. “Thanks to that deficit obsession, government, which could and should be supporting the economy in its time of need, has been pulling back,” groused Keynesianism’s most ardent dogmatist, Paul Krugman.

But really, how heretical is the debt deal? Federal spending for the next fiscal year will comprise 23.3 percent of the entire economy — more than all but nine fiscal years since 1929. (The other years are 1942–1946, 1983 and 2009–2011.) The deficit will be 6.7 percent of the economy, higher than all years since 1929 except for 1942–1946 and 2009–2011. If the United States reenters recession next year, it can’t credibly be blamed on a lack of fiscal stimulus.

But what about the later years of the debt deal? My calculations suggest it will stabilize federal spending at just over 21 percent of the economy by the middle of this decade. That would be higher than the average for government spending for every decade since 1929 except the World War II decade and (just barely) the Reagan decade. According to the left-leaning Center for American Progress, deficits under the deal will average around 3.3 percent in the middle of this decade  (my calculations indicate it will be somewhat lower), well above the 1.9 percent average for the second half of the 20th century.

Most Americans would see these numbers as a meager first step toward fiscal sanity, just before the nation is swamped by the costs of retiring baby boomers’ entitlements.  For the fervent Keynesian faithful, however, the deal is apostasy. Instead, they want the nation to embrace a fiscal version of St. Augustine’s prayer: “Lord, grant me continence — but not now.”

Thomas A. Firey is senior fellow for the Maryland Public Policy Institute and a Washington County native. Citations for material appearing in his columns can be found on his page of the institute’s website, www.mdpolicy.org.

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