Since we’re talking about Keynes today and the new Era of Austerity, which I fear is quite real, I thought I’d put in my two cents. There seems little doubt that Keynes has taken a mighty hit. But my read of the situation is that the hit is almost entirely in the realm of politics rather than economics.
Of course, there’s Keynesianism and Keynesianism. But I’m talking about the broad proposition of that in the face of a dramatic shortfall in demand following an economic crisis, the government plays a critical role as the provider of demand of last resort in getting an economy back on its feet. In the context of the moment that means a big role for government spending. (Put me down in the group of those who think we’ll do better getting the indebtedness problem under control by focusing on jobs and growth that will provide revenues to in large measure grow our way out of the problem.)
The difficulty we find ourselves in is that we came into the crisis already having built ourselves a major structural budget deficit. So we face real long-term indebtedness issues right at the time we need the federal government to pick up the slack. Obviously, these arguments have been rehearsed endlessly for the last couple years and then more broadly back into the 1920s and 1930s.
What’s changed? Not the economics, but the politics. And as grievous a price as I suspect we’ll pay, I’m not certain it should greatly surprise us. Something similar happened, though less acutely, with Franklin Roosevelt in the late 30s, when he was convinced — for a mix of political and economic reasons — that it was time to start budget balancing. The economy lurched back into a second, albeit less acute, stage of the Depression.
There’s something in the nature of the political economy, forces vastly stronger today than they were 80 years ago that leads to this. And there’s a simple paradox. It does make some intuitive sense that the government should have to tighten its belt when the rest of the country is. Only it’s not true. And like a disoriented pilot without instruments to guide, what definitely makes sense can prove fatal.
