The controversy over the validity of John Maynard Keynes’ economic theory is as poignant today as any previous time in its 75-year history–because we are living in the worst economic times since the Great Depression, to which Keynesian economics was a response. So it is no surprise that the late British economist–whose General Theory of Employment, Interest and Money was published in 1936–was recently referenced in two wide-circulation commentaries to make the point that his approach was exactly what [is / is not] needed.
The two articles, neither of which exhibits any sign of knowing about the other, revive a debate which readers themselves may decide through the policies, and politicians, they support. Henry Blodget, editor of the popular Business Insider blog, fired the opening salvo in a commentary titled “Well, It Sure Seems Like Keynes Was Right, published one day before “Bye-bye, Keynes?” by veteran economics columnist Robert Samuelson in the Washington Post.
Blodget opens by saying: “After the experience of the past five years, it certainly seems like John Maynard Keynes was right.” He says he has evaluated the arguments by Keynsians like Paul Krugman, and Keynes critics like Niall Ferguson, and concludes that Keynes (and Krugman) are right.
The reasons the government must “spend like crazy” and that “austerity doesn’t work”–according to Blodget’s logic are that “when the economy is already struggling, and you cut government spending, you also further damage the economy. And when you further damage the economy, you further reduce tax revenue, which has already been clobbered by the stumbling economy. And when you further reduce tax revenue, you increase the deficit and create the need for more austerity. And that even further clobbers the economy and tax revenue.”
That is why Blodget agrees with Krugman that our current economic malaise is because the original Obama stimulus “just wasn’t big enough.”
But the Post’s Samuelson (again, his article is not a response to Blodget) challenges this thinking by saying that “deficit spending and pump priming were plausible responses to economic slumps” in Keynes’ time when governments were “small and their debts modest.”
But, his key argument is that in an era of massive governmental debt, the bond market effectively has a veto over governmental economic policies. “Standard Keynesian remedies for downturns–spend more and tax less–presume the willingness of bond markets to finance the resulting deficits at reasonable interest rates. If markets refuse, Keynesian policies won’t work.”
And indeed, bond markets have already vetoed the economic policies of several European countries. Samuelson notes the irony that “past overuse of deficits compromises their present utility to fight high unemployment.”
Blodget, in his article, points to the New Deal and especially the massive spending during World War II as evidence that Keynes was right–that massive stimulus is the key to reviving the economy. But Samuelson concludes that today’s massive debt “complicates the analysis and subverts the solutions. What might have worked in the 1930s offers no panacea today.”
What do you think? Readers are welcome to weigh in by posting in the comments section below.