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Posted at 11:13 AM ET, 02/16/2011

The (political) failure of Keynesianism

By Ezra Klein

Interesting post by Alex Tabarrok arguing that Keynesian politics -- as distinct from Keynesian policies -- has failed pretty much whenever it's been tried, at least in liberal democracies. Keynesianism might be good economics, but persuading people that the right response to a recession caused by overspending and running up debt is for the government should start spending heavily and running up debt is a bit like trying to persuade an ailing smoker that the answer is cigars. People don't buy it.

What's been more successful are so-called "automatic stabilizers": Programs that spend more during recessions -- that is to say, that have a Keynesian effect -- without Congress specifically passing a new law demanding they do so. Unemployment insurance sends a lot more money into the economy during periods of 10 percent unemployment than 6 percent unemployment. So does Medicaid. The health-care reform bill will have a similar effect, as its subsidies will reach more people when more people lose their jobs. And all this happens automatically. You don't have to hand out copies of “The General Theory of Employment, Interest, and Money” in the Senate.

But one lesson from this recession is those policies should be made much more automatic. Unemployment insurance is built for mild recessions at best. Congress had to keep extending the length of benefits to deal with the long periods of joblessness people in the economy were -- and are -- undergoing. There's no reason that can't be made automatic in the future: If unemployment rises beyond 8 percent in a state, then unemployment insurance in that state becomes instantly more robust. Somewhat similarly, Medicaid should become fully federal: It's funded by a federal-state partnership, and the states find it a crushing burden during recessions -- they're least able to spend more on Medicaid at the exact moment their people need it most.

I also think a future administration looking back at this period will likely consider the stimulus a huge political mistake. The spending -- though arguably quite effective -- was completely invisible. The major tax cuts in the bill, in fact, were designed specifically so they wouldn't be noticed. You may or may not believe a payroll tax holiday would've created as many jobs, but it definitely would've been more appreciated.

In the future, I expect stimulus to take the guise of clear and highly publicized tax cuts much more often than spending projects, even though a lot of the evidence we have suggests spending projects carry more benefits than most types of tax cuts. The only caveat to this is that if the economy recovers over the next two years, Obama is reelected, and he retires a successful president, then the projects the stimulus funded -- electronic health records, roads, rail, weatherization, green-energy funding, Race to the Top, etc. -- may take on a WPA-like glow and the Obama stimulus might come to be lauded by liberals as a moment of historic policy achievement, an example of not letting a crisis go to waste. In that case, future administrations may be more willing to give it another shot, though with some political tweaks.

By Ezra Klein  | February 16, 2011; 11:13 AM ET
Categories:  Economics  
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Comments

I think it's of credit to Obama and his team (and Congress) that they chose a lot of stimulus projects that, while giving a certain stimulative kick in the short term, would also benefit the country in the medium-to-long term, rather than opting for the easy political options.

The fact they designed the tax cuts to *deliberately* not be noticed is about as stark an example of choosing good policy over populist presentation as is possible I think. Good on them.

Posted by: bigmandave | February 16, 2011 11:23 AM | Report abuse

Historians will look at this time period with disdain.

The so called fiction of the temporary stimulus turned out to be much less than fiction. Hence, the US government has gotten a permanent, perpetual increase in US Government spending from ~20% of GDP (as it was in the 90s and 2000s) to 23% of GDP, as evidenced by this week's budgetary documents.


No tax scheme in the history of the United States has ever achieved revenues of 23% of GDP on a sustained basis. This is ths day of ruin.

Posted by: krazen1211 | February 16, 2011 11:26 AM | Report abuse

Good post Ezra. You're right that "automatic stabilizers" is the phrase that pays. As I suggested to Randy Waldman last month, perhaps we could use variable payroll tax rates tied to unemployment rate as an automatic stabilizer.
http://www.interfluidity.com/v2/1072.html#comment-10787

And anything that can authorized without requiring subsequent annual appropriations is for the good. The White House would be sitting a lot prettier with healthcare reform if it had included a "double blank check" like the one used to fund student loans.
“there is authorized to be appropriated, and there are appropriated, out of any money in the Treasury not otherwise appropriated, such sums as may be necessary for the purpose of carrying out section 1072 (c)(7) of this title.”

Posted by: beowulf_ | February 16, 2011 11:28 AM | Report abuse

Finally, Ezra! You're really getting closer to MMT!
Your next stop:
"Full Employment AND Price Stability" by Warren Mosler:
http://moslereconomics.com/mandatory-readings/full-employment-and-price-stability/
Exactly the automatic stabilizer you're talking about and without the irrational stupid fear of deficits.
Have a good reading!

Posted by: pdrub | February 16, 2011 11:38 AM | Report abuse

Regardless of whether Obama is re-elected or not, liberals (myself included) will not look back at the stimulus with our rose colored glasses and think happy thoughts. If that's what the Obama admin is hoping for they are seriously, seriously wrong.

Posted by: knoelle11 | February 16, 2011 11:48 AM | Report abuse

There is 'no policy', it is all Politics only. Talk about Policy is the 'proxy political battle / class warfare' with the language of Economics and some scholarship.

I am glad that Ezra your posts are becoming clearer in terms of talking Politics and how the 'hues' would develop if certain political developments happen in some specific manner.

All these recent posts, so much to like about those.

Throw away that 'wonk rob' and see the world as is - basic class warfare and politics. (It does not have to be Marxian discourse, but in the end it is same....)

Posted by: umesh409 | February 16, 2011 11:52 AM | Report abuse

"...if the economy recovers over the next two years, Obama is reelected, and he retires a successful president..."

Thank you for admitting that what history judges presidents not by what they actually did, but for how the business cycle lines up with their terms.

Policy is irrelevant. The only imperative is to "do something" so that you can take credit for the inevitable recovery. Thus, tax cuts, tax hikes, rebates, and stimulus all "worked" to end various recessions.

Posted by: getjiggly2 | February 16, 2011 12:06 PM | Report abuse

The post was written by Alex Tabarrok not Cowen.

Posted by: TomLindmark | February 16, 2011 12:08 PM | Report abuse

The instinctive fear of deficits and of government stimulation during downturns seems persistently difficult to overcome. AJP Taylor commented on this in relation to Lloyd George's 1929 proposed Keynesian program to overcome unemployment (entitled We Can Conquer Unemployment). It was, wrote Taylor "...in outline, the New Deal as applied later with some success by F. D. Roosevelt in the United States. Great Britain could have been first in the field.
In 1929 the new ideas were too new. Most economists were still unaffected by them. For instance, the accepted textbook of the nineteen-twenties, Economics for the General Reader by Henry Clay, contains no reference to them. Even J. M. Keynes, later regarded as the founder of the underlying theories, had not yet worked out his position fully. ...
Where experts lagged, ordinary men were bewildered. The new ideas underlying Lloyd George's programme were difficult to grasp. It seemed ... paradoxical to argue that individuals benefited more from increased public spending. The lessons of the war [WW I] were all drawn one way. Nations were supposed to have been ruined by the vast expenditure. No one pointed out that they had also prospered while the war was on and had often benefited afterwards from its capital creations. ... Thus there began in 1929 a cleavage between informed opinion and the assumptions of ordinary men which has lasted almost to the present day. The cleavage existed in many fields. Einstein, like Keynes, was incomprehensible, where Newton, like Adam Smith, had been neat and obvious. The concertgoer could hum the themes of Mozart and Beethoven, not those of Stravinsky. He never learnt to hum the themes of the new economics." (English History, 1914-1945)

Posted by: donaldslovin | February 16, 2011 12:37 PM | Report abuse

I think the simple answer as to why Keynesianism has developed such a bad name is because the politicians who love the front-end of it (lavish deficit-spending on pet proje....errrrr, 'investment') don't have the courage of their Keynesian convictions to follow through on the back-end of Keynsian theory....you know, the REDUCING government spending during good times.

Politicians (Democrat and Republican alike) have not been able to muster the intestinal fortitude to do the hard parts of Keynesian theory, which is why it fails....like most other progressive policies, which usually pretend human instinct and behavior never plays a roll (which is why progressives like Ezra believe tax rates can be increased dramatically and not effect private investment, wage growth, GDP, et al).

Posted by: dbw1 | February 16, 2011 3:00 PM | Report abuse

"Interesting post by Alex Tabarrok arguing that Keynesian politics -- as distinct from Keynesian policies -- has failed pretty much whenever it's been tried, at least in liberal democracies. Keynesianism might be good economics, but persuading people that the right response to a recession caused by overspending and running up debt is for the government should start spending heavily and running up debt is a bit like trying to persuade an ailing smoker that the answer is cigars. People don't buy it."

I don't think any post on the political failure of the stimulus can be complete without mentioning the chart:

http://michaelscomments.files.wordpress.com/2010/06/stimulus-vs-unemployment-may-dots.gif

Posted by: jnc4p | February 16, 2011 3:01 PM | Report abuse

Your initial analogy is a bit off..."but persuading people that the right response to a recession caused by overspending and running up debt is for the government should start spending heavily and running up debt...cigars"

I'm not sure most Keynesians would agree with the assertion that overspending and running up debt caused the recession. The latter half is likely true, that the recession adds to the debt, but that's due to service-needed, revenue-down problem.

Posted by: sjd32 | February 16, 2011 3:17 PM | Report abuse

jnc4p:
"I don't think any post on the political failure of the stimulus can be complete without mentioning the chart..."

It's fun, too, to remind everyone of what that week was like when the stimulus was passed. Remember that? The final bill rolled off the presses in the middle of the night (early Friday morning), the House voted on it within hours....and the Senate passed it later that evening, when they used taxpayer money to fly Senator Sherrod Brown back from a funeral in Ohio just so he could cast the deciding vote less than 24 hours from when the bill was printed.

They told us at the time it was because there wasn't a moment to spare, because economic catastrophe the likes of which our planet had never seen threatened our very survival if they couldn't start the historic deficit spending RIGHT NOW.

Of course, they then took 4-5 days to have Obama actually sign the bill into law, because they needed that time to set up a stage with balloons in Denver for the signing ceremony.

So, Recap #1: the Democrats didn't have 2-3 days to wait for Sherrod Brown to get back from the funeral in Ohio to pass the bill, but they had 4-5 days to get the press event set up for Obama's signing.

And then, 12 months later when it was becoming clear the stimulus was nothing more than a pet-project boondoggle, and things were even worse than before the stimulus (see jnc4p's graph), we were told to be patient because they knew all along that it would take 18 months or more for the stimulus to really be effective.

Recap #2: the Democrats didn't have 2-3 days to wait for Sherrod Brown's return to Washington, so they spent taxpayer money to fly him back from Ohio late on Friday night....but told us a year later they knew all along the stimulus would take 18 months or more to do anything.

I can't imagine the rush-to-vote on the ill-conceived stimulus in less than 24 hours from it's printing had anything to do with not wanting right-wing radio and Sunday talk shows a chance to see what was in the stimulus before they voted on it.

Some say the Tea Parties were a result of health care reform....I say it was really the stimulus and how it was passed that got even middle-of-the-road independents angry, and starting the Tea brewing.

Demorat lies led to more waste....tell us something new.

Posted by: dbw1 | February 16, 2011 3:29 PM | Report abuse

krazen1211-- The first line of your post: "Historians will look at this time period with disdain." You're not a historian, are you?Why? Because historians will be digesting and dissecting the time period from 2000 to at least 2012 for a lot of years, probably long after you and I are both gone. I'm sure by time period you meant the Obama administration's first years, but that is just too short a view. To be accurate you have to include everything that led to the Obama Administration, and that most certainly includes all of the Bush Administration, which left a legacy of events that any "next" President would have had to deal with. The years of 2001-2007, when the Republicans were totally in control, must be considered, as must the 2007-2009 period of split government, along with the 2009-2011 Democratic government. You cannot say how historians will look at this era of the early 21st Century yet, and to single out the early Obama Administration with the word "disdain" is way premature. And your conclusion of "This is the day of ruin" might be your opinion but again is premature and hyperbolic. Time will tell, but not quickly.

Posted by: rtinindiana | February 17, 2011 12:53 AM | Report abuse

dbw1 wrote: "Demorat lies led to more waste....tell us something new."

The really wasteful part of the SUCCESSFUL stimulus program was the 40% comprising tax cuts.

What would you propose? The fraudulent supply-side program of tax cuts for the rich? Reagan proved that doesn't work. So did W.

Keynes lost politically because the GOP noise machine--primarily talk radio--kept telling Americans the Big Lie over and over and over and over and over again: Stimulus doesn't work, never did. Pay no attention to the reality of the New Deal and the Great Depression, we have "experts" (all bought and paid for) who swear that FDR made matters worse. Ignore the real numbers, ignore history, pay no attention to that man behind the curtain. Deficits are bad, bad, BAD!

Except when a Republican runs them up. Then they're good and wholesome and all-American.

Historians will look at this period and say that the GOP successfully sabotaged the US economy to their benefit.

Posted by: Garak | February 17, 2011 10:58 AM | Report abuse

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