Tuesday, December 20, 2011

Thoughts on Boettke?

Peter Boettke argues that "Keynesianism cannot work to solve our current problems because Keynesianism is responsible for our current problems", bringing Buchanan and Wagner into the discussion of Samuelson's confused op-ed yesterday.

It's true, Boettke is just pointing us to Buchanan and Wagner and while I'm very familiar with their argument I've never read the book. Perhaps I should read the book before asking questions, but I don't think I'll be particularly surprised by anything - so I don't think it's outrageous to pose a few questions to Boettke about the logic of this post first.

1. First, why is running deficits "the problem"? Boettke doesn't explain this at all and I'm not sure what his argument is. It's crucial for people who think this to actually make an argument rather than just presuming it's obvious, beause most economists don't think it's obvious (although most of the public probably thinks it is).

2. I would have said that Medicare is the only real budget problem we face in this country. The only one. Some people throw in Social Security - my understanding from people who have been on the trust fund's board is that that is a relatively small problem with an easy fix. Some people would throw in our tax policy - but that can change very quickly and easily too. It strikes me as reasonable to say that for the United States, the only problem we have associated with the public debt is Medicare. Bringing this back to Boettke, what could our Medicare problems possibly have to do with Keynesianism? I don't know because he doesn't say, and Buchanan and Wagner don't talk about Medicare at all (based on a word search of the html version of the book).

3. How exactly did Keynesianism cause our problems? Again - the argument is unclear to me. I guess it's clearer if you assume "the problem" is simply the fact that we run deficits persistently when we didn't used to. But that brings us back to #1. Why is that a problem? Everyone who thinks it's a problem seems to think it's self-evident. Everyone who doesn't think it's a problem is left scratching our heads as to what the argument is.

Alert readers may argue Keynes was not a "fiscalist", rendering Boettke's whole post moot. I'm not quite sure about this tactic. Keynes wanted to put the deficits in a capital budget, but he wasn't against "loan expenditures". I think the Keyes/Lerner split is overblown - overblown by Keynes himself no less than anyone else. Certainly Keynesians are comfortable with deficits, and that's the point.


  1. Thanks for anticipating the point I was about to make. I personally think Keynes would have been in favour of "balanced budget multipliers" that stemmed from the capital budget with a surplus. But in practice, we all know the odds of that happening, don't we?

  2. While I do think the Public Choice critique of macro is largely wrong, there does need to be an acknowledgement or the difficulties of running surpluses when the economy approached full employment. Democracy in Deficit makes it clear that under extreme economic duress, deficits are fine, and they are what we got throughout the 19th century. But like the 19th century, we need to be continually running surpluses when we aren't under extreme duress. I don't think it's too farfetched to connect the dots between the rise of Keynesian ideology and the difficulty of running a surplus in more recent decades when deficits are always seen as a positive in the short run.

  3. Daniel,

    I would like to reverse the question and ask 'why is running deficits not a problem'

    Leaving aside the loaded question of whether deficit-funded spending is beneficial or not and irrespective of whether "Keynesians" can be blamed for them surely running continuous deficits will have the following efects:

    - Increase the amount of taxation that must be raised each year just to pay the interest to the holders of the debt. How can these ever-expanding transfers from taxpayers to government debt holders not have an adverse effect on the economy?

    - The growing size of the debt must increase the risk of future debt crises that would likely be resolved either by default or by monetizing the debt (which would lead to inflation).

  4. At current levels of interest rates, deficits are not one bit a problem.

    I also disagree with certain Keynesians such as Brad DeLong who believe there is a need to solve a "long run deficit problem". No, there isn't. United States government has done just fine running on deficits for nearly 70 years since the end of World War II. Why believe it will be a problem by 20 years from now?

    A government can be simply run on central bank "purchases" of bonds, and once inflation needs to be corrected, the central bank may start selling the bonds on the market. Reserve requirements may also be raised to control inflation.

    There is no deficit crisis. There is a crisis of people not understanding how the fiscal and monetary system actually works, resulting in needless punishment through spending cuts and tax hikes.

  5. "I think the Keyes/Lerner split is overblown - overblown by Keynes himself no less than anyone else."


    You might like this paper I stumbled upon a few months ago re: Keynes and Lerner. Apparently Keynes ended up agreeing with Lerner on deficits and functional finance. So talk of a "split" on the issue is obviously overblown.

  6. Warren, you might want to check this post then...



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