What would Keynes do?

President Obama released a new budget plan last week that raises taxes on the wealthy to pay for infrastructure. It does nothing to reduce the current budget deficit In fact he predicted it would rise by 20% next year). The President continuously believes that one more magical fiscal push will get us over the hill. He also thinks that allowing in more poor immigrants, who would easily find work, would boost social security tax revenue enough to offset big increases in spending from entitlement programs. (Is he serious?)

The US budget deficit has shrunk from $1.4 trillion in 2009 to a mere $480 bn now so everyone is relieved. The fall in interest rates has reduced the cost of servicing the outstanding debt. I guess I should be happy but I have a problem…

The recession ended in 2009 so we have had six years of growth and the deficit is still about 3% of GDP. The entire logic of running active fiscal policy (Keynsianism) is that a country must run surpluses in good times to pay for stimulus in bad times. We have forgotten the first part. Politicians seem very sensitive to the flawed recovery since median incomes are not growing and the proper measure of unemployment (U6) still shows that good jobs are scarce. This rather unsatisfying bounce-back has kept them in spending/borrowing mode.

We have record levels of tax revenue and a steady 3% growth rate so politicians need to adjust government spending to suit our current state. Yes, wages are stagnant so  revenue will persistently fail to cover poverty programs caused by lingering un and under-employment: Medicaid, Foodstamps, UIC, and low taxable income. There is only one way to fix this huge (circular) mess (free the Yuan!) and neither Obama nor the Republicans have any intention of doing it. Yet they apparently can’t reconcile themselves to the economic climate that they have created. Every day they whistle on their way to work in a state of denial as though magic will intervene. Perhaps we will grow forever at a faster and faster rate in spite of the economic stagnation in the rest of the world.

If a Democrat is a believer in active fiscal policy he must buy into counter-cyclical budget adjustments, not perpetual stimulation and the buildup of debt. If he can’t then he must become a Republican and advocate a balanced budget – even during horrible recessions. Our anemic economy did not come from tax policy or (too) big government and it won’t be fixed by loose fiscal policy or smaller government.

Keynes had a reasonable idea and exchanging debt for Chinese-made clothes was not part of it.

 

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