Hard Keynesianism Is Hard

Writing about Spanish fiscal policy, I said that really in retrospect the thing for them to have done would have been to run not modest budget surpluses (which is asking a lot of a government), but really big ones to build a cushion against a turnaround of capital flows. Josh Barro pointed out that this is essentially what Chile did:

And it worked out well for them as best I can tell. The big surpluses during the boom years meant they could get away with running a giant deficit during the key crash year. This is what Henry Farrell and John Quiggin advocated for the European Union as “Hard Keynesianism.” It’s not, in other words, all about deficits in downturns it’s also about surpluses during booms. And, again, it’s worked for Chile. They didn’t avoid recession but they got a very nice GDP bounceback:

But here’s the punchline. Chile had been governed by the center-left Concertación ever since the end of military rule in 1990, and it was this Concertación who wisely implemented the Hard Keynesian big surplus policy. But unfortunately for them, Chile had a presidential election scheduled for the bust year of 2009 and they got unceremoniously turned out of power. That illustrates, I think, exactly how politically difficult it is to implement these kind of policies on a consistent basis. Or consider the United States where we had modest surpluses during the late 1990s, then George W Bush came into office and cut taxes explicitly on an anti-surplus platform. Not only did that dissipate the surplus, it managed to retroactively discredit the Clinton administration theory of the long-term. Now any Democrat with any sense has to wonder what the point would even be in balancing the budget if a balanced budget just means there’s headroom for new regressive tax cuts.