Commentary Magazine


Topic: Keynesian economics

Lord Keynes and Human Nature

Robert Samuelson, the distinguished economics columnist for the Washington Post, has a column on one of the most important reasons for the anemic recovery. He blames, with very good reason, the fateful intersection of Lord Keynes’s economic paradigm and human nature, in this case the self-interests of politicians:

Until the 1960s, Americans generally believed in low inflation and balanced budgets. President John Kennedy shared the consensus but was persuaded to change his mind. His economic advisers argued that, through deficit spending and modest increases in inflation, government could raise economic growth, lower unemployment and smooth business cycles….Kennedy’s economists, fashioning themselves as heirs to John Maynard Keynes (1883-1946), shattered…[the old] consensus. They contended that deficits weren’t immoral….This destroyed the intellectual and moral props for balanced budgets.

Walter Heller, Kennedy’s chairman of the Council of Economic Advisors, famously talked about “fine tuning” the American economy to keep it humming along smoothly, throwing off wealth and jobs like an engine throws off work-doing energy.

Keynes had argued that economies were machines, “a whole Copernican system, by which all the elements of the economic universe are kept in their places by mutual counterpoise and interaction.” Governments, thought Keynes, could keep an economy humming by deliberately running deficits in times of slack demand. Politicians, of course, were only too happy to have an intellectual justification for spending in deficit. This allowed them to spend money (“the mother’s milk of politics”) in order to satisfy various constituencies without having to raise the taxes needed to pay for the largesse.

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Robert Samuelson, the distinguished economics columnist for the Washington Post, has a column on one of the most important reasons for the anemic recovery. He blames, with very good reason, the fateful intersection of Lord Keynes’s economic paradigm and human nature, in this case the self-interests of politicians:

Until the 1960s, Americans generally believed in low inflation and balanced budgets. President John Kennedy shared the consensus but was persuaded to change his mind. His economic advisers argued that, through deficit spending and modest increases in inflation, government could raise economic growth, lower unemployment and smooth business cycles….Kennedy’s economists, fashioning themselves as heirs to John Maynard Keynes (1883-1946), shattered…[the old] consensus. They contended that deficits weren’t immoral….This destroyed the intellectual and moral props for balanced budgets.

Walter Heller, Kennedy’s chairman of the Council of Economic Advisors, famously talked about “fine tuning” the American economy to keep it humming along smoothly, throwing off wealth and jobs like an engine throws off work-doing energy.

Keynes had argued that economies were machines, “a whole Copernican system, by which all the elements of the economic universe are kept in their places by mutual counterpoise and interaction.” Governments, thought Keynes, could keep an economy humming by deliberately running deficits in times of slack demand. Politicians, of course, were only too happy to have an intellectual justification for spending in deficit. This allowed them to spend money (“the mother’s milk of politics”) in order to satisfy various constituencies without having to raise the taxes needed to pay for the largesse.

But Keynes had argued equally that governments needed to run surpluses in good times, both to keep the economy from overheating and in order to pay down the debt run up in bad times, so that the money could be borrowed again when needed. But with the old consensus on balanced budgets now shattered, that simply proved politically impossible. Politicians, after all, had elections to win. Keynes had been thinking long-term. Politicians always think short-term.

Between 1947 and 1960, the government had run deficits five times and surpluses nine times. Between 1961 and 2012, through boom and recession, war and peace, the government has run surpluses five times and deficits 47 times. (And even those surpluses were essentially accounting fiction: the national debt rose in every one of those “surplus” years.)

We are not yet at the point where Greece and Spain are—able to borrow only at very high rates. But we are approaching it rapidly, at the rate of a trillion plus dollars a year. And the reason is that Keynes, by far, the most famous and most influential economist of the 20th century, failed to take the messy, self-interested reality of human nature into account when he developed his proposals. So his theory works in theory, but not in fact.

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Our Government Jobs Addiction

The debate about the nation’s declining economy took an interesting turn this past week as liberals have begun arguing that cuts in public sector jobs are sinking any hopes of a recovery. That was the conceit of yesterday’s front-page story in the New York Times that claimed public worker layoffs are hurting the economy. This is an assertion that seems to contradict the focus of most public policy discussions in the past two years — especially during the debt ceiling crisis in 2011 — when most Democrats and Republicans agreed that government expenditures had to be cut and only differed over how much the size of the public payroll needed to be reduced. But with the Republican presidential candidate getting some traction by speaking out on the need to continue cutting back on the size of government, some liberals are pushing back and speaking not only about the cost to the public of cuts in services but also about the role of public sector jobs in inflating the country’s economic balloon.

In a limited sense, they are right, as the wages of government employees are part of the economy and when they disappear, it creates some unemployment as well as a decline in economic activity, not to mention pain for the families involved. But laments about these job cuts should not confuse us about the role the public sector plays in expanding the economy. Genuine growth, the sort of wealth creation that makes all the boats rise, comes from the private sector jobs, not government sinecures. Moreover, if the public schools and other government services are now to be merely seen as jobs programs, then the problems of our education system go a lot deeper than budget shortfalls.

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The debate about the nation’s declining economy took an interesting turn this past week as liberals have begun arguing that cuts in public sector jobs are sinking any hopes of a recovery. That was the conceit of yesterday’s front-page story in the New York Times that claimed public worker layoffs are hurting the economy. This is an assertion that seems to contradict the focus of most public policy discussions in the past two years — especially during the debt ceiling crisis in 2011 — when most Democrats and Republicans agreed that government expenditures had to be cut and only differed over how much the size of the public payroll needed to be reduced. But with the Republican presidential candidate getting some traction by speaking out on the need to continue cutting back on the size of government, some liberals are pushing back and speaking not only about the cost to the public of cuts in services but also about the role of public sector jobs in inflating the country’s economic balloon.

In a limited sense, they are right, as the wages of government employees are part of the economy and when they disappear, it creates some unemployment as well as a decline in economic activity, not to mention pain for the families involved. But laments about these job cuts should not confuse us about the role the public sector plays in expanding the economy. Genuine growth, the sort of wealth creation that makes all the boats rise, comes from the private sector jobs, not government sinecures. Moreover, if the public schools and other government services are now to be merely seen as jobs programs, then the problems of our education system go a lot deeper than budget shortfalls.

The argument about how much role government spending plays in keeping the economy afloat dates back to the Depression and the heyday of Keynesianism. However, the idea that the creation of such public sector jobs creates permanent or sustainable growth is the sort of belief system that sustains bankrupt banana republics, not the United States.

We can reasonably debate just how big government needs to be, and there are cogent arguments to be made that assert the necessity of public services and the problems created when they are axed. But to speak of the schools or other departments as entitlements or as places to shift the unemployed is to take us down a road in which the government is assuming an outsized role in both our lives and the economy and where the private sector is bound to be negatively affected. A society that depends on the government not to just provide for vital services but for employing an increasingly large percentage of adults is one unlikely to be capable of ever digging itself out of an economic hole.

Just as important, dependence on government employment growth means an ever expanding budget deficit that sinks the nation in debt and makes the investment and savings that generate private sector growth and wealth creation less likely. That statist pattern is what we expect to see in Third World countries, where corrupt elites keep unemployment artificially low with vast government jobs programs that are a dual purpose form of stimulus/corruption. Such thinking is not only bad economics it degrades the entire idea of government and ensures that public services will be badly implemented. We are currently a long way from that, but the day our leaders start looking to public sector jobs as a way of solving our unemployment problems, we will have taken the first step toward an addiction to a form of spending that is difficult to break.

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