I don’t trust my own layperson’s economic thinking enough to have a strong conviction that Keynesianism provides the best policy course for those who hold the government carrots and sticks over the economy. But I’m more confident that the opposite of Keynesianism — increasing government spending during boom times and cutting it back during recessions, will do more harm than good.
Unfortunately, according to economist Jeffrey Frankel of Harvard’s Kennedy School of Government, that’s sort of what several administration have done over recent history. Cutting government spending during a recession, or increasing it during a boom period are kind of like steering a car to the right when the road curves left (and vice versa), Frankel writes in this essay for the Project Syndicate.
Frankel served on the Clinton-era Council of Economic Advisers and now sits on the committee that makes the official rulings on the beginnings and ends of recessions. He obviously is a believer in the fundamentals of Keynesianism, but he makes a key point that has been almost lost since the end of the Eisenhower era:
Proper Keynesianism doesn’t just mean government should be willing to borrow and spend to stimulate the economy in bad times, government should also take advantage of good times to pay down some of the accumulated debt so that its credit picture will be in decent shape the next time it needs to borrow in order to stimulate.
The problem is politics, which means the problem is us.
My mind goes to the 2000 Bush-Gore election. The latter Clinton era was a huge boom time (looking back, of course, a lot of that boom looks like a bubble that had to burst, as it did.)
Measuring it in the most conservative way (the on-budget figure, which prevents the government from using the Social Security surplus to mask a non-Social Security deficit) the year 2000 (the last year of Clinton) was the first year since 1960 (the last year of Eisenhower) in which the national debt actually declined as percentage of GDP.
With the wisdom of hindsight, we know that the boom was about to bust. But the then-current projections showed it going merrily into the future, so much so that if we avoided major new spending initiatives or tax cuts, we were on a path to pay off the entire national debt. Can you imagine that?
The bursting of the dot.com bubble would have prevented that from happening. But in that 2000 presidential election, voters had a choice of two fiscal plans. Al Gore wanted to make maximum use of the opportunity to pay down the debt. George W. Bush wanted to enact a gigantic tax cut. I recall him arguing that it would be dangerous to pay down the debt as much as Gore was proposing.
We got Bush and we got the tax cut which, whatever stimulative effect it might have had, was not enough to prevent the next downturn nor get the debt headed back down.
When Republicans rail against the deficit and debt trends under Pres. Obama, I’m not sure what they make of the Bush years. They generally prefer to not talk about it.
I note that the powerful partisan stereotypes still suggests that the Republicans are the party that cares more about deficit/debt but there’s not much in recent history to support the idea. It seems to me that the definition of fiscal conservatives has morphed from what it was before Reagan (fiscal conservatives were deficit hawks) to what it now is, at least in Republican usage (fiscal conservatives are always in favor of tax cuts).