Monday, May 7, 2012

Keynesians are not the problem: short run commitments signaling long-run fiscal consistency

Time inconsistency is usually a problem we think about with respect to politicians, rather than economists. But the other day Chris Edwards at Cato (cheered on by David Henderson and Don Boudreaux) suggests that Keynesians have a time-consistency problem on fiscal issues because while they claim to want stimulus now and budget consolidation later, there is nothing in their short-term recommendations that makes their long-term claims credible.

I was baffled when I first read this on Henderson's blog. I felt like I must be reading something wrong. I often disagree with things that come out of Cato, but I don't normally think of them as a smear or spin group. It seemed to me there was one obvious recent fight where it was Keynesians and liberal economists generally who demonstrated that they were the ones that were serious about the long-term budget problems, and that was the Bush tax cuts. A surplus had been organized, there was no obvious need for a large tax cut, and certainly not a permanent one. It would hurt the long-term budget stance (and that was before the wars and Part D, which cost even more). It seems clear where those credibly concerned with hte long-term budget should fall out on this. This wasn't just a fight under Bush - that's a fight going on under Obama too. The credible commitment of the Keynesians on this seems to be blatantly obvious. Many were even talking about repealing all the tax cuts (not just for the rich).

It's not just the prominent Keynesians who have been consistent on our long-term budget issues, it's liberal budget analysts in general. I think I found the Edwards/Henderson/Boudreaux claim particularly obnoxious because of my personal experience working as a research assistant for Bob Reischauer at The Urban Institute for five years. Bob Reischauer is Mr.-Long-Term-Budget-Hand-Wringer. I didn't have much of an opinion on the federal budget or entitlements before working for him, and it's pretty much because of that experience that I'm a long-term deficit hawk today (the short term is a more complicated question, obviously). There were several occasions I remember sitting on the couch in his office with him up in arms over how destructive some tax or spending proposal was for the long-term budget outlook. This isn't some defense that gets trotted out by liberals and Keynesians when they talk to the media. This was his passion - and this was what infuriated him - behind closed doors as well as in public.

Chris Edwards displays an unfortunate lack of insight into the sort of people he's flinging these accusations toward.

But, I figured it was worth pulling some material together to highlight the point. Most of this is on the Bush tax cuts. It seems to me that's the most obvious example of a politically unpalatable (nobody likes tax increases) short-term commitment that clearly signals a willingness to deal with long-run budget problems (and it was the long-term budget they primarily had their eye on when they proposed repealing the Bush tax cuts). We are in the middle of a recession (and we were when the cuts were passed), so there have been very reasonable discussions of what to do with the tax cuts that weren't for the wealthiest tax payers. This seems acceptable to me. You have to balance the benefits against the costs (and tax cuts for the middle class have more short-term and egalitarian/normative benefits than tax cuts for the rich).
So the next several posts will have these quotations from various Keynesian economists and liberal budget analysts. A couple points:
1. I might not be done. As I find more I may add them.

2. If you have other quotes that also challenge Chris Edwards accusations, please share in the comments (with a link!) and I'll add them to the list.

3. Any prominent liberal/Keynesian budget analyst or economist reading this that wants to put an official statement in the comments communicating their position on the long-term debt is welcome to as well, and I'll post that as well.


  1. Only an ignorant hack quotes from the Tract on Monetary Reform to refute the General Theory. The former contains, "In the long run we are dead". In the latter, Keynes says he has changed his mind on many things.

    1. I am one that things the GT is a maturation of thought, and that there is no clear break. There's a lot of good stuff in the Tract, including that line.

      This mistake, I think, is in taking a statement saying that the short run cannot be forgotten and confusing that with a statement that the short run always takes priority over the long run.

      Remember the context of the line: economists set themselves to too easy, too useless a task if they can only tell us that when the storm has passed the sea will be flat again.


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