When Did Keynesian Economics Live?


Elise Foley, citing Sen. Dick Durbin, says a big deal on spending cuts would be the end of Keynesian economics:

“I would say … that symbolically, that agreement is moving us to the point where we are having the final interment of John Maynard Keynes,” he said, referring to the British economist. “He normally died in 1946 but it appears we are going to put him to his final rest with this agreement.”

Keynes argued that aggregate demand was not always enough to spur full employment and that outside structures, such as governments, could influence the economy to create jobs and regulate business cycles. His thinking influenced later New Deal spending by President Franklin Delano Roosevelt.

Durbin said the economy is too weak for major cuts in spending, a view that is shared by many economists.

I don’t disagree with any of that, but it is worth asking when this time was that discretionary fiscal stimulus as a tool of macroeconomic stabilization was alive and well. Famously, the United States didn’t actually implement a massive program of deficit spending to stabilize the economy in the 1930s. Looking back at the Roosevelt administration what we have is not a Keynesian policy, but a Keynesian interpretation of the trajectory of policy. Monetary expansion leads to big growth in 1933-36, then fiscal and monetary contraction creates a new recession in 1937, and then eventually massive deficit spending to fight World War II had the effect of eliminating unemployment and excess capacity. That’s a Keynesian story. There’s a Keynesian analysis. But obviously the policy was “fight the war” not “deficit spending reduces unemployment.”

Then we had a long period when it was all about the Fed setting interest rates and automatic stabilizers. Then we had the current recession, we had the stimulus bill that economists who believed in stimulus said was too small, and now we have austerity-mania. There hasn’t been, as best I know, any time in which discretionary fiscal stimulus was, in practice and by intention, used on the scale that the theory suggests.