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When the road veers right, don’t turn left, and vice versa

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 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).

Comments (5)

  1. Submitted by Ross Williams on 07/23/2012 - 02:43 pm.

    Proving a point

    “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.”

    This is also a nonsensical way of measuring the debt unless you are trying to prove a point. Its like talking about how much debt grew relative to income, while ignoring money put into savings.

    In fact, the gross national debt declined under every president until Ronald Reagan, with the exception of a tiny increase under Gerald Ford (clarification: relative to GDP and beginning with Truman). It declined again under Clinton. For most of that period there was no Social Security surplus which you allude to.

  2. Submitted by Ray Schoch on 07/23/2012 - 01:23 pm.

    Fiscal conservatism

    …ain’t what it used to be, that’s for sure.

    I have to agree that the old stereotype certainly doesn’t seem to fit on the Republican side. Difficult as it might be for those on the right to admit, Clinton was something of a fiscal conservative while in office. Would that George Bush had been the same.

    Cutting income (i.e. taxes) while taking on the financial burden of huge new expenses (Iraq and Afghanistan), and having to deal with an unexpected emergency (bursting the real estate bubble) created by a supposed “friend” on Wall Street is economic stupidity at its most egregious. Whatever minor temporary benefits I’ve personally gotten from lower taxes, whether through Bush or Obama, have been more than overshadowed by the accompanying spike in the national debt, which my children and grandchildren will have to pay for, and the near-destruction of the national economy. All while a select few amass fortunes that would embarrass Croesus.

    A sensible solution, when debts pile up, embraces not only spending cuts, but also increasing income. On the “cut” side of the ledger, I’d be willing to listen to some ideas about entitlement reform, since they take up the lion’s share of the discretionary budget, but not unless and until there’s some serious effort to scale back the bloated and largely indefensible (irony point) defense budget, part of which, since soldiers and sailors get old, too, overlaps the entitlements. As for guns, airplanes, ships, etc., we’re spending borrowed money we don’t really have to defend ourselves against enemies that don’t really exist, save in the fevered minds of right wing cranks and the paid advocates of defense contractors.

    In the meantime, there’s plenty of evidence online and elsewhere (e.g., that the current tax system substantially favors the wealthy (and corporations) over ordinary working families.

    On the income side of the ledger, it would not be difficult to raise the national income, the better to meet our fiscal obligations, without increasing the burden on middle-class families to any significant degree. Doing so, however, would require an exercise of political will that the current Congress – Republicans especially, but Democrats are not without blame here, either – apparently finds impossible. We cannot cut our way out from under the national debt. We have to pay it down. Doing so requires national income, and justice requires that the income be proportional to the ability to pay. Personally, I think that proportionality ought to apply to corporations as well as individuals.

  3. Submitted by Neal Rovick on 07/24/2012 - 08:23 am.

    Greenspan and the Bush administration are on record as being in fearful in 2000 that ALL of the debt would have been paid off by 2011. This provided the justification for the tax cuts that eventually lead into the hole we are in now.

    The Bush era was notable for the fact that, despite record tax cuts and the worlds largest real-estate bubble, very few new jobs were created and wages were stagnant.

  4. Submitted by Peder DeFor on 07/24/2012 - 09:20 am.

    Lower Spending

    It’s certainly fair to criticize how Republicans acted from 2000-2006 but as the article points out, there should be times for actually spending cutting too. Can anyone point to attempts to so so during the boom times of the 90’s? My memory is that of the Gingrich GOP holding the Dems spending in check. Certainly we did much better in terms of deficits but the actual size of the budget increased year after year.
    Given this understanding of Keynes, where we reduce spending at certain times of the boom/bust cycle, is anyone from the left going to put some heat on Dems for ever increasing spending?

  5. Submitted by Paul Brandon on 07/24/2012 - 08:58 pm.


    What you don’t mention is that the Bush tax cuts were packaged with off-the-books wars that ultimately added considerably to the deficit.

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