Milton Friedman famously said, “In one sense, we are all Keynesians now; in another, nobody is any longer a Keynesian.” Friedman intended the quote to show how the individual concepts of Keynes had informed all of economic theory, despite his broad conclusions being false.
The same quote could be interpreted very differently today. On the one hand, we are all Keynesians because we are all dependent on the Obama administration’s unflinching trust that government spending will help us out of the recession. On the other hand, nobody is a Keynesian, because the theories used to support the spend-now, pay-later approach are a misrepresentation of Keynes.
Keynes, whose economic theories appeared discredited after the stagflation of the 1970s, has returned to prominence. Sadly, his entire career, which spanned four decades, has been distilled into three words: “government deficit spending.” Nuance has given way to caricature.
The White House may be the worst offender. It is true that Keynes would have likely supported the idea of deficit-financed government expenditures to dig our way out of the recession. This, after all, is the same economist who said that the government should fill bottles with money, bury them in coalmines, cover them up with trash, and then let people dig them up, as opposed to doing nothing. Apparently, that is the chapter in Keynes’ opus, “The General Theory of Employment, Interest, and Money,” where Obama’s team of economists stopped reading.
In fact, that “spend for the sake of spending” approach to stimulus was only half of Keynes’s equation. The other half, as Carnegie Mellon economist Allan Meltzer points out, is the need for a strategy to eliminate today’s high deficits. As he said in a recent CNN interview,
Today, deficits are getting bigger and bigger with no plan to significantly lower them. Keynes understood what the current administration doesn't understand that the proper policy in a democracy recognizes that today's increase in debt must be paid in the future.
Keynes was clear in his opposition to structural deficits, yet the budget released by President Obama seems to accept them as a reality. The White House’s 2011 budget shows that the annual deficit will hover around $700 billion in the next decade before jumping back above $1 trillion in 2020. In that time span the national debt will grow from $9.3 trillion to $18.6 trillion.
Rather than stimulate, such enormous structural deficits will actually depress the economy--a notion that Keynes factored into his economic theories.
The problem is that Obama and his faux-Keynesian disciples failed to factor in the importance of investor confidence. As Keynes himself wrote,
The state of confidence as they term it, is a matter to which practical men pay the closest and most anxious attention.
Obama’s policies have done just the opposite. Rather than create stability necessary for growth, the stimulus funds were disbursed ad hoc amongst a hodgepodge of projects. Instead of creating faith in the market, enormous deficits have led investors to worry about inflation and interest rates. Moreover, the Greek debt crisis has fanned the flames of fear that have swept across the United States.
Americans are desperately looking for stability. Gazing out into a sea of red ink would be much easier on the eyes if we knew Obama had a long-term plan. Instead, the president attempts to assuage our fears with talk of how addressing deficits should be a “medium term” goal. As if anyone actually knows what that means.
What it means is that President Obama didn’t do his homework. If you’re going to follow Keynes down the rabbit hole of government spending, at least have a full understanding of his philosophy. Instead we are left with a half-baked plan of poorly targeted government spending and very little else. This is not Keynes. Then again, as Milton Friedman once told PBS, “the term ‘Keynesian’ can mean anything you want it to mean.” That has never been more true than in Obama’s White House.