John Maynard Keynes was one of the most influential economists of the last century. He is most famous for his influence on government fiscal policies, advocating countercyclical actions: Deficit spending during recessions, and suppressing inflation during boom cycles through tax increases and spending reductions. President Bush announced on Thursday a fiscal stimulous plan that would pump up to $150 billion into the economy. This is a move right out of Keynes’s playbook, but what consequences will it bring?
The Cato Institute’s Director of Tax Policy Studies, Chris Edwards, calls this measure “Keynesian Kool-Aid” in a podcast released on January 18th. Edwards argues that borrowing from one sector of the economy and giving it to another is not a means of improving overall welfare. To do so, he argues, would merely increase the budget deficit and levy an increased tax burden onto future generations. In order to truly attack a slumping economy government policy should be focused on pro-growth measures, such as cutting marginal tax rates on work, saving, and investment.
Keynesian theory, in and of itself, has been largly discredited by the economic community. The manner of implementing such policy inevitably leads to expanded government, and political incentives to employ deficit spending and subsidy programs indefinitely, rather than as temporary measures as Keynes intended. Government programs, once started, are rarely scaled back during periods of economic prosperity. This reality is the failure of government to implement the second part of the countercyclical policy.
Nonetheless, there is a powerful political movement pushing government to do “something” about the slumping economy. Whether or not handing Americans a check for $150 billion will improve the long-term welfare of the country is questionable. Let’s just hope such measures are temporary, infrequent, and do not expand the scope of government control on either the economy or other aspects of our lives.
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As if the middle class were not already choking under that huge steaming pile of hope and change. But hey, my taxes will be going up, so as Obama said, ‘everyone must sacrifice’, and ‘spreading the wealth around is good for everyone’. So the middle class will need to ante up as well. GOOD TIMES!