A Keynesian Misunderstanding Regarding Deficits

The Great Recession has resulted in massive deficits as government stimulus programs are used to try to revive the economy. This process has resulted in a misunderstanding regarding Keynesian principles.

How do you stimulate an economy? This is the rather large golden question. With the Great Depression, the government and Federal Reserve did nothing until the disaster was well along. Japan took a similar approach to its economic meltdown in the mid-1990s. Both approaches were shown to be an utter failure.

The proper answer would then appear to be a view espoused in the Keynesian school of economics – the government must spend to stimulate the economy. This is the approach that has been taken first by the Bush Administration with TARP and then the Obama Administration with the current stimulus bill and additional tax credit programs. Has it worked? Yes and no. The economy stabilized, but fears of a double dip are legitimate particularly given the failing economic situation of the PIIGS in Europe.

One aspect of the current stimulus effort is the effect on the national debt. The total we owe to creditors just surpassed $13 trillion and we have another 60 to 70 trillion dollars in unfunded liabilities coming due in the next 20 to 40 years. The massive government spending is adding to this figure now at a rate of $1.5 trillion a year. Even under the wildly optimistic figures of the Obama Administration, the debt will go up by an additional $1 trillion a year through 2020.

Interestingly, all of this is blamed on the Keynesian economic theory. This blame is misplaced. John Maynard Keynes did advocate government spending to stimulate economies. That being said, he also advocated the balancing of government balance sheets. How could these two seemingly conflicting ideas balance out? Simple. Keynes felt that the government should spend its way out of recessions, but then pay down the debt that was incurred when times were good through spending cuts and/or tax increases. Thus the debt went up in bad times and down in good times.

Our politicians obviously do not subscribe to this conduct. It doesn’t matter if you are a conservative or liberal, Democrat or Republican. They all do it. The Bush Administration forced through the prescription medication program which adds eight trillion to the deficit. He did TARP as well. Obama’s guidance is adding at least a trillion to the deficit each year. Ronald Regan created a massive amount of debt during his terms despite supposedly being an economic conservative. It was so bad that the elder Bush had to raise taxes despite his “read my lips” proclamation. Oddly, it was only Clinton who was able to balance the budget for a few years during his two terms, primarily because he and the Republican Congress were at such loggerheads that nothing got passed!

The national debt is not a problem caused by Democrats or Republicans. It is a problem caused by both. I personally disagree with Keynes on many things, but what is happening in this country is not a reflection of his theories. It is cronyism pure and simple, the utter corruption of our government.

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