We Were All Keynesians Once
By D.J. McGuire | Friday, August 5th, 2011 | History, Policy, Politics
One thing about the debt-ceiling debate that completely threw the chattering classes was the victory (however temporary) for opponents of tax increases. Every previous “bipartisan” deficit reduction plan, save one, since 1982 included a hefty tax increase – and the execption (the 1997 deal) involved a Democrat in the White House who had rammed a massive tax hike through a friendly Congress in 1993.
There was, however, one major difference between all of those deals and this one: the academic environment. If that sounds strange (and I know it does), just keep reading.
Behind the various political back-and-forth on political economics was the overarching Keynesian consensus – confirmed in no uncertain terms by Richard Nixon, who famously declared himself a Keynesian in 1971. Keynesian economics was a mathematical construct that essentially favored government spending over tax reductions, tax increases over spending cuts, paper money (and lots of it) over hard money, and in general, more intervention over less intervention. It was also the unquestioned dominant school of thinking in academia in the 1960s, and in politics once Nixon signed up in 1971.
Clearly, some folks still cling to the spirit of ’71, such as the folks behind the new Better Choices in Virginia crew, an amalgam of left-of-center groups who are calling on Virginia to raise taxes should a shortfall occur during the next budget cycle. Here’s Michael Cassidy’s take on things (WaPo):
If Virginia chooses to close this future budget shortfall with a cuts-only approach, it will impede our economic recovery and cost jobs in both the public and private sectors. We need to preserve what works in Virginia and get the state back on course.
If you bend your ear, you can even hear George Harrison’s “My Sweet Lord” in the background. However – as much as I hate to break it to Cassidy – it hasn’t been 1971 for a long time.
Keynesian economics started losing the professors almost as soon as it conquered the Republicans. Nixon hadn’t even left office before Thomas J. Sargent began building the Rational Expectations Theory. By the end of the ’70s, Keynesianism was fighting RET and Monetarism in the academic world and supply-siders in the political world. As the latter shifted from an economic argument about Aggregate Supply to a political one about the financial effect of tax cuts, it slowly lost steam, while in academia, “New Keynesianism” joined the battle.
Through it all, however, Keynesians’ greatest argument – the one that still trumped its rivals – was the idea that government spending was “multiplied” throughout the economy (Keynesians themselves call the effect “the mutliplier”). So long as that multiplier was left unchallenged, politicians in both parties gravitated towards more spending and away from low taxes. This was the case throughout the 1980′s, 1990′s, and even the aughts. Arguments against tax increases were largely political; arguments for them were financial; and most importantly, the government spending that caused the argument in the first place always seemed to occupy the high ground in economics.
That is, until 2009.
In what can only be described as an irony no literary artist would dare to conceive, economists began probing the real-world effect of the Keynesian multiplier just as the most ardent Keynesian president in 40 years assumed office. What they found eroded the basis for Obamanomics in a way no one could have guessed during the 2008 campaign.
In truth, anti-Keynesians always had trouble with the “multiplier.” The biggest problem they had with it was the fact the government spending (particularlky deficit spending) meant the feds were taking investment money awy from someone else. In other words, a project paid for via taxes or bonds takes away money that could have been invested in new or expanding businesses, thus negating any initial benefit to the economy. The effect of this “crowding out” of private investment was a raging debate between Keynesians and their opponents . . . until empirical examinations of the multiplier started coming in.
What they found was eye-opening. The OECD economists found crowding out to be so heavy that it drove the multiplier below 1. Stanford economist John Taylor found a similat multiplier-turned-divider (his was 0.5). Harvard economist Robert Barro determined through his research that the multiplier was effecitvely zero, i.e., government spending’s benefit to the economy was nonexistent.
Suddenly, the economic arguments behind Keynes’ theory – even to those who accepted the constructs behind it – were turned on their heads. If government spending had such a weak effect, then tax cuts were better, while raising taxes were worse than cutting spending. Sure enough, when the president initially unveiled the stimulus of 2009, several leading economists whacked it, including Taylor and Sargent themselves.
This is the new divide that was reflected during the debt debate. The Teabrewers are not crazy, out-of-touch loons; they are the political force behind the greatest economic challenge to Keynesianism that the old school has ever faced – but if you’ve kept yourself stuck in 1971, you wouldn’t know anything about it.
Thus the disconnect from Cassidy, Obama, MSM, and others. The ground has shifted beneath their feet, yet the don’t understand why they’re falling. All they need to do is look at a calendar.
Cross-posted to the right-wing liberal
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Former candidate for Board of Supervisors in Spotsylvania, current blogger, economics teacher, and long-rumored windbag. There are two causes closest to the heart: steering the country away from the social democratic nonsense that is sinking Europe, and convincing the rest of the "rightosphere" that the NBA really is a joy to watch.
Comments
8 Responses to "We Were All Keynesians Once"
Bless you. The crack in the paradigm widens.
I will always maintain that Keynes’ theories were, and are, admired and followed by politicians for the simple reason that they tell politicians what they want to hear:
1) that government has a right to manage the economy
2) that an economy can be endlessly “stimulated” by endless borrowing and deficits
There is an aversion to setting up a working system and then leaving it alone. The urge to tinker and intervene is unstoppable. (Idle hands do the devils work or something.) The Reagan tax plan of 1986 was largely considered a good plan by liberal and conservative analysts alike. Yet a few years later there they were messing with it.
Of course Obama and other Dems have a different agenda than growing the non govt economy so Keynesian economics works just fine for them.
val,
You’re right. In the Army, we have an expression for that phenomenon: “If it ain’t broke, then don’t fix it.”
I’m glad that D. J. talked about the Keynesian tax reforms, as well. In all this liberal hullabaloo about “rolling back the Bush tax cuts for the rich,” what gets lost in the rhetoric is that Bush rolled back the massive tax increases that Clinton pushed through a Democratic-controlled Congress. Other than an impeachment crisis that was based on unprecedented lying to the American people, the main similarity between Nixon and Clinton was their Keynesian economics.
Every time I hear a liberal bleat about the “Bush tax cuts,” I feel like doing my best Jack Nicholson impression and yelling, “You can’t handle the truth!”
D. J. Well written and insightful article. Nixon’s exact quote, if I recall correctly, was “We are all Keynesians now.” But like you said, this is no longer 1971. I also remember Nixon’s “Three Phase” economic plan, Ford’s WIN campaign (Whip Inflation Now) and we all now where this finally put us under Jimmy Carter. That, to me, is when the real debate finally began and yes I agree the Tea Party has been instrumental in getting this debate moved to the forefront. Again, very well presented D. J. I greatly appreciate it.
Is the issue truly Keynesian economics or is it a fundamental misunderstanding of Keynes by the deficit spenders. Didnt Keynes actually call for cyclical deficit spending that would then be reduced when the economy recovered and the private sector kicked in. The deficits we were running in the prior to the economic collapse left no room for a Keynesian solution (we were already overleveraged)
Austrian Economists were right! http://www.mises.org
SE — I think the greatest misunderstanding of Keynes’s economic policies is that if you read his actual writings, he would laugh at most of what is called Keynesian. He was a strong believer in elitist central planners applying a wide variety of tools as needed. The stimulus tool seized on by mid century Keynesians was just one of many. Yes, it was the central focus of his magnum opus, but not the only tool in the tool box. I believe John Maynard himself would have been the first to stand up in 2009 and say “guys, this particular problem is not a nail and if you hit it with the hammer of stimulus you will make a bad situation much worse.”
The problem with Keynes is that so many people know so much about his work that simply isn’t factual. They prepare their responses before ever reading what he actually wrote and even then focus on small excerpts. I have been shocked at the number of Phd level economists who debate Keynes on a regular basis without ever actually having read his monetary theory cover to cover. I’ve made it about 3/4s and yes it is skull splitting boring but worth the effort. I have also read some his shorter more easily digested works that tend to be overlooked. “Economic Possibilities for our grandchildren” is one of the best and speaks directly to many of the challenges facing our generation.
Keynes’s greatest weakness was his 110% commitment to elitist central planning. This was much more of a problem then his support for any particular economic tool. Which is why Hyak’s book is titled “Road to Serfdom”. The early Austrian’s shared many of Keynes’s views regarding how the use of particular policy tools would impact the economy. Their concern was more about the coercive effect of central planning on human freedom. Keynes himself acknowledged the possibility of central economic planning becoming a path to totalitarianism but argued in his letters to Hyak that it was a minimal risk, easily controlled in a free society. It is possible but not likely, Keynes would have changed his view of central planning had he lived long enough to see the full impact of post war communism. I believe he would have been horrified by the excesses but his elitist snobbery so thoroughly permeates his writings, it is doubtful he ever would have embraced market economics dominated by glorified shop keepers.
Peter-interesting and thanks for the weigh in. I did nnot realize Keynes’ commitment to central planning. I think we are in agreement however that about the recent stimulus not being what Keynes would have called for in the situation. When I said no room for a keynesian solution I was referring to the classic deficit spending stimulus.
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