The Problem With Keynesianism Is Politics


Keynesianism fails most often in the United States not because of economics, but politics.  When I speak of Keynesianism I am oversimplifying a variety of theorists who base their thoughts on John Maynard Keynes.  Generally, I am describing those who view one of the role of governments is to borrow and spend money to lessen recessions, but in times of plenty cease borrowing and pay down debt.

This is not a post trying to resolve the Conservative view that Keynesianism fails on economic theory and data and the Liberal view that it is correct on theory and the same data.  The problem is that the proponents of Keynesianism outside the halcyon campuses of academia, those people who actually have to govern, cannot pay down debt in good times.  They either look to growth to preserve a recession’s new baseline of absolute dollar spending or they simply cannot assemble a coalition to push the cuts and debt payments through Congress.

Politicians in times of growth have a hard time not spending money.  We can debate Keynesianism.  I am afraid we cannot debate the political spending reality.

If you look at the graph below on GDP growth and Debt growth, you can see in modern times that with the exception of the years following World War II and part of the Clinton presidency politicians of both parties are simply unable to pay down debt in times of growth.


File by By Ninjatacoshell

And even in the Clinton years the growth spike that made possible a balanced budget and modest pay down in debt barely dipped down to 0% growth in debt.  The lesson is not the Keynesianism does not work, but that American politicians are simply unable to follow it.

This blog has time and time again focused on the importance of outstanding leadership as the key component in an organization.  You have to have great people and great products, but without great leadership even initial success with a great product will bleed away over time.  So the easiest answer is to say vote for politicians with the courage to cut deficits in times of plenty.

But an equally important lodestone for the blog is look at the data.  And the data says that at best we have had two bursts of responsibility in the late 1940s and the Eisenhower years followed by a second short lived burst in the late 1990s.  In both of those periods growth provided the engine and the politicians used at least some of it to follow Keynesianism’s dictum to pay down debt.  But it is not a reasonable political theory of governance to suggest that we can now suddenly elect leaders willing to follow both sides of the equation.

We may in fact be at the start of a more general and broad based recovery.  We have had recovery in the stock market and the beginnings in housing, which are all traditional leading indicators.  And as if on cue, we see Keynesians such as  Paul Krugman saying that we really do not need to worry about deficit spending in entitlements now.  Worse, we see the left wing of the Democratic Party essentially saying we never need to worry about entitlements we just need to tax the wealthiest parts of American society.  Obviously, the Bush years of the 2000s demonstrate the Republican Party is just as blind in times of plenty.

We better figure out a new economic theory for the United States that will work in our political system.  There is no point in arguing for a doctrine that works brilliantly in a graduate school classroom or overseas, but has failed over decades to penetrate the American governing class.  Pounding your head against a wall is not governing.