Big government is not Keynesianism (and vice versa.)

Here’s Arnold Kling:

Scott Sumner writes,

I am amazed by how many proponents of fiscal policy don’t understand that it’s symmetrical. Fiscal policy doesn’t mean more government; it means more government during recessions and less government during booms, with no overall change in the average level of government. Anyone who doesn’t even get to that level of understanding, who doesn’t think in terms of policy regimes, is simply not part of the serious conversation.

I agree with the first two sentences, but not with the last.

Yes, in theory, there should be economists who, as they argued for more stimulus in 2009, should at the same time have been arguing for entitlement reform or other reductions in future spending. Other things equal, the bigger debt that we have accumulated over the past five years would make a non-ideological macroeconomist want to propose tighter fiscal policy somewhere down the road.

But “nonideological” and macroeconomics are nearly oxymorons. Name a prominent economist who believes that fiscal expansion is important during recessions and who also is to the right of the median economist on issues like school choice or taxing the rich or the usefulness of regulation. Or try to name a prominent economist who is to the left of the median economist on those issues and who does not believe that fiscal expansion is important.

A few comments:

1.  The eurozone is far to the left of America.  They have very big government, some of the biggest in the world.  And they rejected Keynesianism decisively during this crisis.  Keynesians like Paul Krugman were horrified by the austerian policies of the eurozone.

2. Australia has a relatively small government by developed country standards and did do some fiscal stimulus during a crisis.

3.  There are many conservative Keynesian economists in America. Greg Mankiw famously named his dog “Keynes.”  Glenn Hubbard is a Keynesian.  Ben Bernanke is a Republican.  George Bush did Keynesian-style fiscal stimulus in 2008.

4. It’s true that Keynesians favor bigger government than non-Keynesians, on average. People like Paul Krugman would prefer the government spent at least 40 to 50% of GDP rather than 30 to 40% of GDP. But this is true regardless of whether the government uses monetary or fiscal policy to smooth out the business cycle. So Krugman’s support for bigger government and Krugman’s support for fiscal policy at the zero bound are conceptually very different. One way we know this is that Krugman does not support fiscal stabilization policy when the economy is not at the zero bound. If his support for Keynesianism was purely ideological, why would he abandon that support when interest rates rose to 3%?

5.  I understand that when we are in a cynical mood it’s tempting to say “Keynesians favor raising government spending as a share of GDP and recessions, and raising taxes as a share of GDP during booms.” But that’s not really what Keynesianism is about, that merely reflects the fact that this particular Keynesian is living in a country with a smaller government sector that they would prefer. As we see from the recent events in Europe, once government reaches a size that Keynesians are broadly satisfied with, they no longer favor steady increases the size of government. Policy becomes symmetrical.

Even when groups of people have views that are highly correlated, it’s very important to keep those views conceptually distinct when discussing the merits of various public policies. It’s true that those who favor single payer healthcare also tend to support public schools, but it makes no sense to oppose a single-payer healthcare regime on the grounds that education vouchers are a good idea.


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30 Responses to “Big government is not Keynesianism (and vice versa.)”

  1. Gravatar of Tom Tom
    20. October 2013 at 09:46

    I’m disappointed you failed to mention two types of fiscal stimulus, both more gov’t spending (like Krugman always wants; name the year/month when he wanted less since 2001), and less taxes. Tax cuts are fiscal stimulus.

    Bush did tax cuts to successfully minimize the dot.com bubble pop 2001 recession. Had Bush – Obama did trillions in tax cuts, rather than pork-stimulus, the current recession would have been far less severe.

    The Dem Party demonization of tax cuts, led by Krugman, made smaller gov’t types anti-Krugman the Keynesiest. And rightly so, in the current political reality.

  2. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    20. October 2013 at 10:07

    Can’t be sure, but;

    http://www.voxeu.org/article/economic-uncertainty-and-effectiveness-monetary-policy

    ———quote——–
    Our findings indicate that indeed monetary policy is less effective when uncertainty is high. This implies that when uncertainty is high, monetary policymakers may face a trade-off between acting decisively and acting correctly, as policy must be more aggressive than otherwise in order to stabilise economic activity.

    Our results are consistent with the “caution effect” suggested by economic theory, which maintains that in presence of fixed adjustment costs uncertainty increases agents’ opportunity cost of waiting and therefore makes policy less effective.

    Our findings, however, show that the pattern of reduced policy effect is particularly stark when uncertainty measures from financial markets are utilised. This could indicate that financial channels are playing a role. Further research on the exact mechanism behind the policy ineffectiveness effects we find seems warranted.
    ———endquote———-

  3. Gravatar of ssumner ssumner
    20. October 2013 at 10:18

    Tom, I mentioned both spending and taxes. I assumed readers would know that tax cuts are stimulus.

    Patrick, It’s not clear what that study shows. How are monetary shocks identified? (if it’s interest rates, then that’s a problem.) How do they know that the uncertainty is not caused by bad monetary policy?

  4. Gravatar of Geoff Geoff
    20. October 2013 at 10:24

    “I am amazed by how many proponents of fiscal policy don’t understand that it’s symmetrical. Fiscal policy doesn’t mean more government; it means more government during recessions and less government during booms, with no overall change in the average level of government. Anyone who doesn’t even get to that level of understanding, who doesn’t think in terms of policy regimes, is simply not part of the serious conversation.”

    The second sentence isn’t correct either.

    While in theory “fiscal policy” means more government during recessions and less government during booms, it does not follow from these facts that the average level of government does not change over time. It does not follow because the depths of the underlying booms and busts are not themselves symmetrical.

    Also, and to Kling’s point, the depth of government intervention during recessions and the depth of government retrenchment during booms tend not to be symmetrical either, even if the underlying booms and busts are symmetrical. Once government gets its teeth into society, it is very difficult to reverse it. Witness for example the “temporary only” argument for the income tax starting in 1913. Once power is centralized, special interest groups, and the power itself, has an incentive not to reverse that power. This is how the size of government in the US has steadily increased over the last century.

    What we should be thinking about fiscal policy during booms and busts is to ask “Given there is a recession, do we want the called for fiscal policy to remain during booms?”

    If the answer is no, then the reasonable thing to do is not call for any fiscal policy during recessions, since it will tend to stay, or shrink only modestly, after the recession is over.

    Fabian socialism is the goal of full socialism by small increments over time. This is the dominant guiding philosophy today.

  5. Gravatar of benjamin cole benjamin cole
    20. October 2013 at 10:57

    Oh sheesh…left-wingers are for spending? Does anyone know that just three agencies—Defense, VA and Homeland Security—account for $1 trillion in outlays?
    Astonishing fact of the day: There are 3.5 million Americans receiving monthly disability checks…from the VA. Work disincentives anyone? Socialism run wild?
    I wish there was a small government party..no the Donks are no better…

  6. Gravatar of Andrew_M_Garland Andrew_M_Garland
    20. October 2013 at 11:00

    === ===
    Sumner: “Krugman does not support fiscal stabilization policy when the economy is not at the zero bound. If his support for Keynesianism was purely ideological, why would he abandon that support when interest rates rose to 3%?”
    === ===

    Is “fiscal stabilization policy” the gloss on much increased government spending?

    If Krugman supports increased govt spending of 10% of GDP (regardless of tax revenue!), then how can you tell what motivates him at the moment?

    Has Krugman ever abandoned his support for increased govt spending, under any circumstances? That is, has he ever called for limits on government spending at any time, not just in the possible, theoretical, maybe future?

  7. Gravatar of Luis Pedro Coelho Luis Pedro Coelho
    20. October 2013 at 11:04

    I don’t thin the Eurozone rejected Keyensianism decisively, they just rejected international welfare functions in favour of national ones.

  8. Gravatar of Benny Lava Benny Lava
    20. October 2013 at 12:11

    Full blown outbreak of KDS today.

  9. Gravatar of John John
    20. October 2013 at 13:39

    “Keynesians like Paul Krugman were horrified by the austerian policies of the eurozone.”

    http://epp.eurostat.ec.europa.eu/tgm/table.do?tab=table&init=1&plugin=1&language=en&pcode=tec00023

    I don’t see a whole lot of “austerity” going on. The trend across the Eurozone and echoed in most countries was a spike in government as a percentage of the economy in 2009/10 followed a return to spending at higher than pre-crisis levels. What Krugman was calling for in this period was not Keynesian, he got very Keynesian policies in 2009/10. He was calling for a permanent expansion of government.

    I understand the theoretical difference between Keynesians and socialists/big government advocates, but in the real world I think you can afford to ignore it.

  10. Gravatar of Gordon Gordon
    20. October 2013 at 13:58

    I agree with the title of your post, “Big Government is not Keynesianism.” My fear is that politicians have too much incentive to misrepresent and misuse it in order to gain political advantage by pleasing rent seekers or constituents. And that’s why I’m glad monetary policy is an effective alternative.

  11. Gravatar of TS TS
    20. October 2013 at 14:40

    There are several corollaries to Keynesianism that show why its proponents will favor a larger government:
    1. Government spending is not terribly inefficient.
    2. Governments can react in a reasonable time to crises.
    3. Limited controls/regulation on the economy are not sufficient to prevent and remedy crises.

    If some economists use any of the three principles as roughly guiding principles in forming ideology, then we should see a strong association between Keynesianism and big government.

  12. Gravatar of dtoh dtoh
    20. October 2013 at 15:57

    So Krugman’s support for bigger government and Krugman’s support for fiscal policy at the zero bound are conceptually very different. One way we know this is that Krugman does not support fiscal stabilization policy when the economy is not at the zero bound. If his support for Keynesianism was purely ideological, why would he abandon that support when interest rates rose to 3%?

    PK is an ideologue and a hypocrite. He just wants bigger government period. He supports fiscal stabilization (which to him is bigger government) at both the 3% and 0%. The only difference is that it’s easier to cover his hypocrisy at 0% than at 3%. If it didn’t totally expose him as fraud, he’d openly support Keynesianism at 3% as well.

  13. Gravatar of Geoff Geoff
    20. October 2013 at 16:26

    Sumner:

    “One way we know this is that Krugman does not support fiscal stabilization policy when the economy is not at the zero bound.”

    Yes he does.

  14. Gravatar of rbl rbl
    20. October 2013 at 17:55

    I guess it is easier to assume that everyone who disagrees with you is a hack arguing in bad faith, rather than acknowledging the possibility that economics is a complex field and it is possible for intelligent people to come to different conclusions, or even be mistaken, without being evil.

  15. Gravatar of ssumner ssumner
    20. October 2013 at 18:38

    I think some people missed the point. Krugman is a supporter of big government. Krugman is a Keynesian. That doesn’t make them the same thing.

  16. Gravatar of Al Al
    20. October 2013 at 19:26

    In addition to being a hypocrite for promoting big government at all times, Krugman is also a hypocrite for calling for higher taxes and reduced deficits during the Bush administration. Then, a democrat takes office and he calls for big government. What’s the difference between then and now? That’s right–a democrat is in office.

  17. Gravatar of Geoff Geoff
    20. October 2013 at 19:27

    “I think some people missed the point. Krugman is a supporter of big government. Krugman is a Keynesian. That doesn’t make them the same thing.”

    What makes them the same thing is the persistent desire for deficits, due to a perception of persistent economic calamities that conveniently call for such deficits.

    Orthodox Keynesianism doesn’t actually call for more government during busts and less government during booms. It is far more fundamental. Keynesianism is based on a convinction that capitalism suffers from an inherent flaw of too much saving and not enough spending, and without a government to continually interfere, capitalism will allegedly suffer from permament depression.

    The missing part in all of this is that Keynesianism is itself destructive, and so, unintentionally or not, Keynesians end up preaching for more government to solve the problems that prior government has caused.

    It doesn’t matter if they SAY they only want more government during busts and less government during booms. The fact that they want more government at all sets in motion a feedback loop where Keynesianism lays waste to the economy, which of course is blamed on capitalism, and so even more Keynesianism is called for as a solution, with more problems, and so on.

    It’s just like monetarism in this respect.

  18. Gravatar of Tom Tom
    20. October 2013 at 20:33

    Wow the ignorance of the teahadists is a sight to behold. Liberal Keynesians like Krugman certainly want to see a more activist government even when the economy is at full employment. Not surprising since we used activist government to put a man on the freaking MOON when the economy was booming.

    This has nothing to do with counter-cyclical fiscal policy during a recession.

  19. Gravatar of John John
    20. October 2013 at 21:48

    Tom,

    Putting a man on the moon was a complete waste of money. Sure it’s cool and all but it a complete waste of resources. The cost of materials and computing power that went into the moon landing was taken away from the people and put to a frivolous use. It’s practically the same thing as just burning the money.

  20. Gravatar of Steve Steve
    20. October 2013 at 22:00

    Geoff,

    Look on the bright side. You can be intellectually precise and non-redundant and still say “Krugman is a Big-Government Keynesian.”

  21. Gravatar of Tom Tom
    20. October 2013 at 22:05

    John,

    Yeah, just like burning money or maybe…

    http://www.nasa.gov/centers/johnson/techtransfer/technology/index.html

  22. Gravatar of dtoh dtoh
    20. October 2013 at 22:43

    I think some people missed the point. Krugman is a supporter of big government. Krugman is a Keynesian. That doesn’t make them the same thing.

    Nope. Being a Keynesian implies some sort of honest intellectual belief in its principles. Endorsing Keynesianism by deluding yourself into believing it or pretending you believe in order to further an ideological political agenda is not Keynesianism.

  23. Gravatar of Britmouse Britmouse
    21. October 2013 at 00:36

    Counterpoint: The UK fiscal stimulus of Nov’2008 was launched when the BOE base rate was 3%. Krugman supported it then, most British Keynesians still think it was a good idea.

  24. Gravatar of ssumner ssumner
    21. October 2013 at 04:52

    Britmouse, Krugman claims the US hit the zero bound in October 2008, when T-bill yields fell to zero. The policy rate was still well above zero. I don’t know about Britain.

  25. Gravatar of W. Peden W. Peden
    21. October 2013 at 06:14

    Bank Rate in the UK didn’t fall to 0.5% until March-

    http://www.bankofengland.co.uk/boeapps/iadb/repo.asp

    The November 2008 fiscal stimulus in the UK was in response to the infamous four-point-five-percent-lower-bound.

  26. Gravatar of John John
    21. October 2013 at 08:00

    Tom,

    You’re acting like the market doesn’t produce research and innovation. The money spent towards sending someone to the moon or fighting the Vietnam war was completely unaccountable to consumer preferences.

  27. Gravatar of Morgan Warstler Morgan Warstler
    21. October 2013 at 09:44

    This is why Roger Farmer is so much fun.

    He’s a Keynesian that wants smaller govt. The fact that he’s given so little shrift prove Kling right.

  28. Gravatar of Britmouse Britmouse
    21. October 2013 at 13:12

    That’s a good point, and UK bill yields did track much lower than Bank Rate in late ’08 – but still far above 0%. In late November 2008 when the fiscal package was announced, 3m bills were the lowest at around 1.4%.

  29. Gravatar of ssumner ssumner
    21. October 2013 at 17:30

    W. Peden and Britmouse, OK, I see your point. Here are possible explanations:

    1. Krugman wasn’t paying close attention.

    2. He thought rates would soon fall to zero, so it was a good time to start fiscal stimulus, given policy lags.

    3. He’s not sincere in his NK disclaimers.

    I’d tend to give him the benefit of the doubt here, although in the past I’ve criticized him for ignoring the fact the the eurozone has not been at the zero bound over most of the past 5 years, and hence monetary offset applies.

  30. Gravatar of Geoff Geoff
    22. October 2013 at 18:25

    Steve:

    “Look on the bright side. You can be intellectually precise and non-redundant and still say “Krugman is a Big-Government Keynesian.”

    I don’t consider being able to call someone something a bright side at all.

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