What Keynesian Budgeting Would Really Look Like

This is hardly the main point they make, but Henry Farrell and John Quiggin’s piece on the Eurozone crisis contains an excellent one-paragraph summary of what orthodox Keynesian budget practice would really look like, taking the concept out of the mythic realm of simply caring less about budget deficits:

Contrary to the beliefs of nearly all anti-Keynesians—and, regrettably, some Keynesians, too—Keynesianism demands more, not less, fiscal rectitude in normal times than does the orthodox theory of balanced budgets that underpins the EU. John Maynard Keynes argued that surpluses should be accumulated during good years so that they could be spent to stimulate demand during bad ones. This lesson was well understood during the golden age of Keynesian social democracy, after World War II, when, aided by moderate inflation, the governments of the countries in the Organization for Economic Cooperation and Development greatly reduced their ratios of public debt to GDP. This approach should not be confused with the opportunistic support for large budget deficits evident, for example, among advocates of supply-side economics. If anything, “hard” Keynesianism suggests that the problem with the macroeconomic rules governing the euro is not that they are too tough and too detailed but that they are not tough or detailed enough. States in the eurozone should not be allowed to run moderate budget deficits in boom years, the Keynesian argument goes; instead, they should be compelled to run budget surpluses. The surpluses could then be saved in rainy-day funds or used to pay down government debt or, if the country had reached a satisfactory debt-to-GDP ratio, spent as a fiscal stimulus in the event of a crisis. Unlike the kind of budget management advocated by the German government, this approach does not seek to eliminate or minimize governments’ leeway to conduct fiscal policy. It gives governments up-front the means to manage demand whenever they might need to.

One might go further and say that one of the lessons of the fake “Great Moderation” is that countries facing large net inflows of private funds (like the USA and Spain) ought to be running really gigantic budget surpluses during non-recessionary years. That wasn’t necessary during the heyday of Bretton-Woods and managed exchange rates because you dealt with the flow on that end, but in the modern world after the hegemony of the dollar it seems like it might be necessary. The conservative prescription of enacting large debt-financed tax cuts amidst an economic growth cycle fueled by private sector debt, and then immediately pivoting to austerity and spending cuts right when a recession hits and the private sector starts massive deleveraging is a disaster.