A very brief primer on John Maynard Keynes was that he was a strong advocate that Monetary Policy should encourage low interest rates, with the money supply being expanded liberally, and that Fiscal Policy should be such that consumer demand is expanded by government spending, even if a balance of payment deficit results. Today virtually all OECD countries practice Keynesian policies. But the HPAE countries rely on economic growth to lift the poor out of poverty.*
But the above is a very general overview. The devil is in the details. Running a government deficit was a new thought for policy makers in the 1930s. Today, however, virtually every country in the world practices Keynesian economics, and regularly runs deficits. Is this what Keynes wanted? Absolutely not. If he could see today the amount of red ink that is being generated, he would be turning over in his grave. Keynes was a deflation hawk. Deflation can be a killer to an economy. During the Great Depression, with deficit spending, the US had reduced the unemployment rate from 24% to 14%. Not bad. At that point (1937) deflation had been defeated, and Keynes advocated that Roosevelt return to classical economics and started ratcheting down the deficits.** Of course he was ignored, and the unemployment rate started to go up...15%....16%....17%. Politicians had been hooked on now not having to go through that pesky process of balancing the budget every year. Roosevelt's other errors were raising taxes on the wealthy, excise taxes on everyone, and implementing social security which took money out of everyone's weekly paycheck. With the massive spending of World War II, we finally emerged from the depression. Some economists would argue that that degree of deficit spending is exactly what we need. However, WW II spending would have led to horrendous inflation but for wage and price controls. But this strategy, as Richard Nixon found out in the early 1970s, only works under conditions of total war.
Keynesian economics works to a point. It does stimulate demand. But what about supply? Demand is the consumer side of the equation. Supply is the producer....the one who hires people so they have a paycheck and can buy the goods that are produced. By raising taxes on the producer (whether it be corporate taxes or taxes on the wealthy), you will kill or seriously slow down any chance of an economic recovery.
The problem today with most policy makers in governments around the world is that most are lawyers and not economists. Worse, they are lawyers with an agenda. I would lay long odds that none of them have ever read any of the works of Keynes and thus have no idea what he really advocated. But if they are going to call themselves Keynsians, they should know what he really taught.
Unfortunately, in the US, we are making the same policy mistakes that Roosevelt did. There is no threat at all of deflation, yet we are running massive deficits which is building our national debt to $17 trillion as of the date of this writing. The interest payments alone on that debt come to $10 billion a week! That is over half a trillion dollars a year....in interest alone! Think of all we could do for the poor with half a trillion dollars. By the same token the policy makers want to raise taxes on those who are the job creators. Christina Romer, the former head of President Obama's Council of Economic Advisors, studied tax cuts from 1947 to 2005. She found that a tax cut equivalent to 1% of GDP resulted in a 3% growth in GDP if those tax cuts were permanent.*** They need to read her report before proceeding with any tax on the rich. Romer also states the following: "In short, tax increases appear to have a very large, sustained, and highly negative impact on output.......The persistence of the effects is suggestive of supply effects......Tax cuts have a very large and persistent positive output effect." ****
In short, if someone is going to claim they are a disciple of a wise man, they need to know what he really taught.
Postscript: Quotes from Keynes
"Avarice and usury must be our gods for a little longer still. For only they can lead us out of the tunnel of economic necessity into daylight." Essays In Persuasion; p. 372
"Since the human race is still poor, we should be encouraging, not discouraging, investment." General Theory, p. 321
"Aggressive taxation may defeat its own ends by diminishing the income to be taxed." Collective Writings, 21:145
"National debt should be to its own citizens. Moreover, tax rates should never have to be increased to pay for the new debt. " Collective Writings, 20:349
"The boom, not the slump, is the right time for austerity at the Treasury." Collective Writings, Vol 21
*OECD -- Organization for Economic Cooperation and Development which consists of the Euro Zone, the US, and Australia. HPAE -- High Performing Asian Economies which consist of China, Hong Kong, Indonesia, Japan, Malaysia, Singapore, South Korea, Taiwan, and Thailand.
** London Times -- Jan 12 - 14, 1937; Collective Writings, Vol 21, p. 385
Zombie Economics; Professor John Quiggin, p. 87
*** Forbes 2/16/09
**** The Macroeconomic Effects of Tax Changes; American Economic Review 100 (June 2010)
