Some people are Keynesian. It’s a term from economics favoring the opinions of famed economist John Maynard Keynes.
While he believed in free markets, he believed that they were sometimes inefficient and required government interventions. He believed that government spending could spur growth and such investments were particularly important when economies are in recession.
The main torch carrier for Keynesianism these days seems to be nobel prize winning columnist Paul Krugman of the NY Times who argues often in favor of government stimulus and against austerity as in this post.
Opposing economists believe that government spending “crowds out” private investment and therefore is a deterrent to long-run economic growth. The leading thinker in this school is perhaps Milton Friedman, the leading thinker behind the theory of Monetarism.
This school - which literally came out of the University of Chicago (of which I am a graduate) - advocated using the supply of money to control interest rates and thus inflation. It has a profoundly positive impact on the economic stability of many nations in the world through stronger federal monetary policies.
Government stimulus leads to inflation and thus the two forces - stimulus and inflation - can be working in opposite directions. It should be noted that inflation is not neutral. It helps some (people with big debts like people who own houses) while it hurts other (namely older people with fixed incomes whose savings can be eroded by inflation).
I was reading Robert’s Samuelson’s post in the Washington Post today. He asserts something that I see in every single article about the fiscal cliff. That if we have major spending cuts & taxes go up it will lead to another recession
The $500 billion of tax increases and spending cuts scheduled for early 2013 would probably cause a new recession. The Congressional Budget Office predicts the unemployment rate, now 7.9 percent, would go to 9.1 percent by year-end 2013.
This seems to be universal fact in every single article I’m reading these days.
What I find strange is that nobody is questioning the opposite. Many on the right assert that increasing the stimulus would be reckless.
I’ll come to a second on which side of that argument I fall on, but it is worth noting the hypocracy in the coverage and in the points-of-view that the fiscal cliff - if not solved - will have a drag on the economy but stimulus would have no positive effect and would be morally outrageous.
Don’t journalists even see the contradiction?
So where do I fall?
On balance I think stimulus does help the economy so I’m somewhat Keynesian. On balance in an economic crisis I think it’s sensible to protect jobs because they are biggest determinant of economic stability.
(and there’s always a but)
In 1937 Keynes argued
“The boom, not the slump, is the right time for austerity at the Treasury.”
He was arguing against austerity in the Great Depression. He was right when we’re in a depression. But other than that he may be mathematically right but he’s politically wrong.
I don’t believe that spending cuts ever happen unless you’re in economically difficult times so the best time to agree to some structural changes to our entitlement system and tax code is now.
How can anybody argue in 2012 that Social Security shouldn’t be means tested? How can anybody seriously argue that the retirement age shouldn’t be raised. That tax breaks for agriculture, oil and the like shouldn’t be closed.
So while I’m Keynesian in outlook I also believe that you must use economic conditions to drive change since nobody ever compromises on “pork” unless they have to.
But I find the inconsistencies in reporting and how people talk about the fiscal cliff versus the stimulus programs of 2008-2010 maddening.
What about you? Anybody like to make some apolitical commentary or offer viewpoints?