May 14, 2013, 12:01 am
Keynes and Keynesianism
Bruce Bartlett held senior
policy roles in the Reagan and George H.W. Bush administrations and served on
the staffs of Representatives Jack Kemp and Ron Paul. He is the author of “The Benefit and
the Burden: Tax Reform – Why We Need It and What It Will Take.”
Before the recent brouhaha about John
Maynard Keynes fades from memory, I’d like to make a few final comments about
Keynesian economics.
Perspectives from expert contributors.
When I began studying
economics in the early 1970s, the term “Keynesian” was already losing its
luster. In fact, one can date the precise moment when it became passé: Jan. 4,
1971. On that day, President Richard Nixon gave a joint interview to several
television journalists. After the cameras were off, he made an offhand comment
to Howard K. Smith of ABC News that he was “now a Keynesian in economics.” The
New York Times reported this statement
in a brief article on Jan. 7, 1971.
The article says Mr. Smith was taken aback by
Nixon’s statement, because Keynes was viewed as being well to the left, politically and
economically, and Nixon was
viewed as an arch-conservative. Mr. Smith said it was as if a Christian
had said, “All things considered, I think Mohammad was right,” referring to the
prophet who founded Islam.
The Times’s economics columnist Leonard Silk quickly noted the
significance of Nixon’s remark and said the president was actually carrying out Keynesian
policies at that moment. His budget for the next fiscal year, which would be
released in a few weeks, would be “expansionary,” Nixon had said in his
television interview. Instead of aiming for budgetary balance in nominal dollar
terms, Nixon said he would aim to balance the budget on a “full employment” basis.
This statement was really no less controversial
than the one Nixon made about Keynesian economics. Conservatives viewed it as a
license to run
budget deficits forever. The idea, now called the “cyclically adjusted
deficit,” is to separate the share of the budget deficit resulting from a
downturn in the economy, which automatically raises spending
and reduces revenue, from its “structural” component, which is a function of
the basic nature of the budget itself.
The point of looking at the deficit on a cyclically adjusted basis, which the Congressional Budget Office calculates regularly, is to avoid cutting spending that is only temporarily high and will fall automatically as the economy expands, or raising taxes that will automatically rise. Such actions would exacerbate the economic downturn.
The point of looking at the deficit on a cyclically adjusted basis, which the Congressional Budget Office calculates regularly, is to avoid cutting spending that is only temporarily high and will fall automatically as the economy expands, or raising taxes that will automatically rise. Such actions would exacerbate the economic downturn.
According to
the C.B.O.,
the economic downturn has
increased the budget deficit by about 2.5 percent of the gross domestic
product annually since 2009. It also calculates that if the economy were operating at its
potential based on its productive capacity – what used to be called “full employment,” a term now
in disuse among economists – G.D.P. would be $1 trillion larger this year.
Conservatives still don’t like calculating the
deficit any way except literally. All adjustments are assumed to be tricks to make it look
smaller, they believe. But back in 1971, having a Republican president talk about an
expansionary budget policy and balancing the budget on a full employment basis was radical
stuff indeed.
The irony, of course, is that Keynesian
economics, which had
dominated macroeconomic thinking since the war, was already dying. For
decades it had been under intellectual assault by economists associated with
the University of Chicago known as “monetarists.” Their most well-known
spokesman was Milton Friedman, who argued against the
Keynesians’ focus on fiscal policy – federal spending and taxing policy – and
their inattention to monetary policy, which is conducted by the Federal
Reserve.
As it happens, Friedman had said in 1965 that
“we’re all Keynesians now” in the Dec. 31 issue
of Time
magazine. He later complained
that his quote had been
taken out of context. His full statement was, “In one sense, we are all
Keynesians now; in another, nobody is any longer a Keynesian.” Friedman said
the second half of his quote was as important as the first half.
But it wasn’t only those on the right, such as
Friedman, who were abandoning Keynes; so were those on the left such as the
Harvard economist John Kenneth
Galbraith,
an early and energetic supporter of Keynesian economics. In July 1971, he said
that Keynes was obsolete because big business and big labor so controlled the
economy that Keynesian economics didn’t work.
Galbraith said that it was
“sad that Mr. Nixon has proclaimed himself a Keynesian at the very moment in
history when Keynes has become obsolete.”
By 1976, it was common to hear world leaders denigrate Keynesian
economics as primarily responsible for the problem of inflation. That year,
Prime Minister James Callaghan of Britain, leader of the left-wing Labor Party,
gave a speech to a party
conference that repudiated the core Keynesian idea of a countercyclical fiscal
policy. It only worked, he said, by injecting higher doses of inflation that
eventually led to higher unemployment.
The following year, Chancellor Helmut Schmidt, of West Germany’s
left-wing Social Democratic Party, likewise repudiated Keynesian economics. The
German economy, he said, had avoided inflation by resisting the temptation to implement
countercyclical fiscal policies during economic downturns. “The time for
Keynesian economics is past,” Mr. Schmidt explained, “because the problem of the world today is
inflation.”
On his blog last week, Paul Krugman took me to task for
misconstruing the generality of Keynesian theory. My point was that policy
makers in the early postwar era routinely accepted the idea that Keynesian
stimulus was justified whenever the economy wasn’t doing as well as they
wanted.
I acknowledge that this view derived mainly from
economists who called themselves Keynesians rather than Keynes himself. He was,
in fact, a strong opponent
of inflation who would have opposed many “Keynesian
policies” of the 1950s and 1960s, which contributed to the problem of
stagflation in the 1970s that ultimately discredited those policies.
Economists and policy makers mostly forgot that Keynes
prescribed budget surpluses during economic upswings to offset the deficits
that he correctly advocated
during downturns. In his 1940 book, “How to Pay for
the War,”
he advocated balancing the budget over the business cycle.
I think Milton Friedman was right that in a
sense we are all Keynesians and not Keynesians at the same time. What I think
he meant is that no one advocates Keynesian stimulus at all times, but that
there are times, like now, when it is desperately needed. At other times we may
need to be monetarists, institutionalists or whatever. We should avoid dogmatic
attachment to any particular school of economic thought and use proper analysis
to figure out the
nature of our economic problem at that particular moment and the proper policy to deal with it.
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