Word now comes that Great Britain has slipped back into recession after several years of David Cameron’s austerity experiment. It seems, yet again, that John Maynard Keynes has been proven right. Real Keynesianism–government deficit spending–is essential when economies go bottom up. This can mean more government programs or lower taxes, or a combination of the two. That would seem to be plain vanilla logic, right? But you’d be amazed how many otherwise intelligent people disdain Keynesianism these days–four decades after Richard Nixon said, “We are all Keynesians now.” There’s a reason for that.
Keynes has gotten a bad name because we didn’t really practice what he preached from the mid-1960s till Bill Clinton and Newt Gingrich balanced the budget in 1998. Keynes was for deficit spending in bad times, but against it when the economy is growing. Indeed, as Sylvia Nasar points out in her wonderful book Grand Pursuit, Keynes and his alleged nemesis Friedrich Hayek had come to a meeting of the minds on this point in the years after World War II. (Yes, in the end, Hayek was a Keynesian.) The U.S. went off the rails, and away from true Keynesian economics, during the administrations of Lyndon Johnson, Richard Nixon (who proved to be not so good a Keynesian after all), Jimmy Carter and, yes, yes, Ronald Reagan, all of whom went berserk with deficit spending in good times (aided and abetted, of course, by a Democratic Congress).
George W. Bush revived those lousy practices during his terms in office. “Ronald Reagan proved deficits don’t matter,” the remarkably wrong-about-almost-everything Dick Cheney famously declared. Barack Obama has continued the deficit spending–but for good Keynesian reason, since the bottom dropped out of the economy in 2008.
There are those on the left who take a modified Cheneyian position, that deficits don’t matter, or more appropriately, that they matter less than deficit hawks think they do. I’m not so sure (in fact, anyone who say he or she is sure is blowing smoke). As a general rule, deficit spending on capital programs–real investments in the future, like the Interstate highway system–is a good thing. Deficit spending on old-age entitlements, by contrast, is a disaster. It would be nice to have a conversation about this issue in the presidential campaign this year, especially now that Mitt Romney seems intent on returning from the Island of the Ignorant. And in that spirit, I have a proposal: Romney should make a personal pledge never again to utter the ridiculous phrase: “Government doesn’t create jobs.” He certainly shouldn’t utter it while also supporting a defense budget far larger than we need, including job-creating weapons systems that would have been more appropriate to the cold war.
As David Cameron is learning, rather painfully, in times of trouble, government can be the most reliable job creator we have.