Stimulus and the Welfare State

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In the course of an otherwise excellent column, Martin Wolf offers what I think is a misleading aperçu:

Whatever the rhetoric, I have long considered the US the advanced world’s most Keynesian nation – the one in which government (including the Federal Reserve) is most expected to generate healthy demand at all times, largely because jobs are, in the US, the only safety net for those of working age.

Two points in response to this. One is that the Keynesian prescription is not only for the government to run deficits in response to recessions, but to run surpluses in expansions. Thus, the Clinton administration’s fiscal policies were arguably “Keynesian” but the Reagan and (especially) George W Bush administrations were implementing an agenda that flew in the face of Keynes’ ideas much more clearly than anything Angela Merkel’s ever done.

But I think the bigger problem comes with trying to construct a dichotomy between a “safety net” and a government “expected to generate healthy demand at all times.” The Keynesian take ought to be that a well-designed safety net helps to stabilize aggregate demand by stabilizing disposable income flows. Understood in this light, the key fact about US fiscal policy during the current recession is that there’s nothing well-designed about state and local budget practices in the United States and the burden-sharing between the federal and state/local sides of the American welfare state hasn’t been put together for good reasons.