For all the billions of bytes devoted to criticizing Barack Obama’s economic strategies (Why wasn’t the stimulus bigger? Why didn’t he get the debt limit raised earlier?), there seems to be hardly any discussion of a much more significant question: Why hasn’t any major industrialized democracy employed a Keynesian response to the Great Recession?
The economic argument for a Keynesian stimulus says that typical recessions are driven by weak demand and confidence. Governments can help by borrowing and spending temporarily. An argument from justice says that human needs rise acutely in recessions; governments can assist by spending wisely. And a political argument says that people want the state to do something now even if it has to borrow. In fact, one might fear that democratically elected governments would always borrow and spend (regardless of the merits of that policy) and so would grow in every crisis until they became tyrannies.*
Instead, we see the European democracies cutting their budgets in a time of recession or near-recession. President Obama won the passage of a stimulus package, but it was equivalent to less than 6% of GDP, one third of it was devoted to tax cuts, it was largely offset by cuts in local and state spending, and after less than two years, the opposition won an election vowing to repeal it. This Brookings report describes the stimulus policies of the US, China, Spain, and Saudi Arabia as “large.” They mean relative to other countries. There were also “modest” stimulus packages in a few other democracies, such as Germany (3.4% of GDP; two-third devoted to tax cuts) and Canada. I believe all of these were short-lived.
Here are three possible explanations for the lack of Keynesian policies in almost all advanced democracies–or, to put it another way, three reasons why Barack Obama, despite engineering an inadequate recovery package, strikes Kevin Drum (who is a Keynesian) as the best or second-best leader in the whole world today.
1. The Keynesian theory is wrong, and leaders are wisely rejecting it. This Wikipedia article provides a sample of that position plus rebuttals. I don’t buy it because the Keynesian theory makes sense to me and because various influentials (the president of the World Bank, the Chancellor of the UK, the head of China’s Central Bank, and the President of the United States) explicitly recommended stimulus policies. By the way, here’s a primer in rap form on the substance of Keynesianism:
2. Political systems are manipulated by economic interests (corporations and wealthy individuals) that don’t want governments borrowing now and taxing them later. That could certainly be the case, but it raises some interesting questions: How is it that such different democratic systems have all become more susceptible to wealthy interests over time? (Mobility of capital, perhaps?) Also, how do these special interests coordinate their efforts to make them effective? Many corporations actually benefit from stimulus policies. Low taxation is in the interest of wealthy people, but they all share that interest. Game theory predicts that no individuals will actively lobby against a stimulus if they bear the cost of the lobbying but share the benefits.
3. Voters have lost trust in government and so don’t believe that a stimulus will work. Actually, the lack of trust is a fact, demonstrated by consistent survey data. But we could ask whether distrust makes leaders leery of stimulus policies. A second questions is where that lack of trust comes from. Some would say that the special interests noted in #2 have deliberately delegitimized governments through propaganda: Fox, Murdoch, Mediaset. But note that other special interests have explicitly advocated stimulus: Goldman Sachs, for example. I think it’s more likely that a) governments have performed badly and b) the fundamental shift toward individualism and choice in the 1960s biased people against hierarchical organizations.
If you’re a Keynesian, you should work to reelect President Obama (who’s your best available ally) and try to figure out what deep, structural factors explain global resistance to Keynesianism today.
* I thought I could quote Hayek to this effect, but he doesn’t specifically target Keynesian stimulus policies in the Road to Serfdom, and Keynes, intriguingly, wrote to Hayek to thank him for a “grand book.” Keynes said, “Morally and philosophically I find myself in agreement with virtually the whole of it; and not only in agreement, but in a deeply moved agreement.”