In response to some great points from LK on the macroeconomic record of the third quarter of the 20th century, Peter writes: "It is called the economics of illusion ... Albert Hahn got this right years ago. Our current problems are not a decade old, but six decades old -- see Kotlikoff on intergenerational accounting, and Buchanan and Wagner on why this "fiscal child abuse" is the political legacy of Lord Keynes."
Can someone explain what Peter could possibly be thinking of? Looking at the actual course of public debt over the last six decades is helpful here:
The first thing to note is that the debt load of the post-Depression period has never, ever, ever been in a danger zone. We are getting into uncomfortable zone, and we were in an uncomfortable zone in WWII, but we have a sense of the debt limits of fiscally responsible states and we're not courting that at all.
The next thing to note is that for the first three deades of Peter's six decade period - when Keynesianism was actually guiding fiscal policy to a large extent - we had a declining debt burden. To Keynesians this isn't surprising, of course, because Keynesianism is all about responsible fiscal policy, maintaining leg room for action when it's necessary, extracting demand through smaller deficits when appropriate, etc.. And if things are going smoothly there's no reason to run up public debts anyway, so you'd expect the burden to decline.
Democracy in Deficit was published in 1977, at the very low point of this trend. What could they have possibly been thinking? After years and years of more or less responsible policy and growth Keynes is somehow leaving a legacy of fiscal irresponsibility? Generally speaking I would give a blanket endorsement of James Buchanan's work, but what he's done on Keynes is a notable exception. I encourage people to read the critical responses to Democracy in Deficit.
So how can one argue this?
After 1977 the story changes somewhat. Writ broadly, fiscal policy still seems to be under control of course. There were arguably geopolitical issues in the 80s that needed to be dealt with. I think one can say that the fiscal accomodation of the period was highly unnecessary, but there seems to be no reckless build-up here that is introducing problems now. Anyway, this has little to do with Keynes or Keynesianism. The debt problem - to the extent that there was one in the 1980s - was a very Classical effort to improve the productive capacity of the economy, coupled with a political unwillingness to make spending cuts. There's a lot to criticize there, but of course none of it has anything to do with Keynes - as Peter seems to suggest it does.
The spike in the debt in recent years is of course at least partially attributable to Keynesianism, but:
1. The Keynesian argument is that this is precisely the time to shoot any fiscal ammunition you've got, so there's a real challenge to the idea that this is even a problem.
2. No reasonable person thinks the deficits we've been running the past couple years have anything to do with our long-term debt problem. Let me rephrase that for emphasis: if you think the deficits of the past couple years are our long-term debt problem you either don't understand the federal budget or you're not a reasonable person, or both.
3. A lot of this is due to low tax receipts and has nothing to do with policy decisions anyway.
The real debt problem - to the extent we have one - is an entitlement problem, particularly a problem with Medicare. We probably need to do another fix of the tax system too - which seems daunting with the current Congress. But my point is, both of these can be done within the confines of what has become normative American post-war political economy. You don't need to wreck or abandon anything about post-war political economy to make the fix. But it's equally important to recognize that neither of these problems - entitlements or taxes - has anything at all to do with Keynesianism or Keynes's legacy.
So why do I see Peter arguing this in a variety of fora - often just accusing people he disagrees with of partaking in the "economics of illusion" without ever actually explaining himself? The logic, to me, seems circular:
Keynes is not one of those responsible "mainline" economists, ergo any irresponsibility among politicians (much of which is misdiagnosed, as I've noted, but we can leave that aside for a second) must have it's origin in Keynes's legacy because Keynes dominates post-war economics. But on what grounds are you calling Keynes an irresponsible, non-mainline economist?, I would ask Peter. It seems to me he is very much in the well grounded tradition of Smith, Mill, and the rest of the mainline? Well look at the impact he's had on the way we think about political economy in the post-war period!, I imagine Peter would respond (and he is welcome to correct me if I'm wrong).
The claims are circular. Keynes is non-mainline and therefore has lead us down this terrible path. How can you claim he's not mainline? Well he's lead us down this terrible path so clearly he's not mainline!
And it's tough to argue the point because anyone that thinks Keynes is an important figure is defined out of the mainline themselves.
I, for one, am getting a lot less out of Coordination Problem than I used to. Hopefully these things are cyclical.