Tax Analysts Blog

The Real Problem With Keynesianism

Posted on Feb 16, 2011

Ezra Klein thinks Keynesianism has a serious political problem.

    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.

He's right, but Keynesianism has another problem, too. If lower taxes and higher spending are a tough sell in bad times, try peddling higher taxes and lower spending in good ones. At least the recession cure is packed with goodies. The prosperity "cure" involves nothing but pain and denial. Good luck with that ...

This fact has always haunted champions of countercyclical fiscal policy, but it was particularly acute in the early days of the Keynesian revolution. In 1934 (before Keynes had published his General Theory but well after economists had begun debating dynamic, countercyclical fiscal policy), economist Joseph Schumpeter spoke for many skeptics. He was, in general, fairly comfortable with countercyclical revenue policy. “[T]axation itself may be made a useful instrument of remedial policy if taxes which are in any way proportional to business success are systematically lowered in depression and increased in prosperity,” he wrote in January 1934, “in which case they would act in a way similar to that of the variations of the rate of interest.” (For the relevant citation and more discussion of this issue, see my recent article in Law and Contemporary Problems.)

But Schumpeter was far less sanguine about the political viability of countercyclical spending policy, which he believed inherently corruptible.
    Whilst wholeheartedly agreeing with the argument about the pivotal importance, in crises, of government expenditure on public works, and especially on direct relief for the unemployed, I am disposed to lay greater stress on the necessity of not letting budgets go entirely to pieces, and of upholding the principles of careful and conscientious administration of public finances, to which it may be practically impossible to return when once the spirit of reckless expenditure has been allowed to grow up.
In retrospect, Schumpeter was right to be worried. Politicians have never been good about curtailing spending once it's been ratcheted up in the name of defense, demand management, or any other imperative. But he was clearly too sanguine about the malleability of tax policy, too. Once upon a time, politicians did raise and lower taxes to help manage aggregate demand. Consider, for instance, the temporary war tax imposed during the Vietnam war to help curb inflation.

Nowadays, by contrast, most tax revisions (at least those of the downward variety) are presumed permanent until proven temporary-- even when they come with an explicit "use by" date.

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