The Corner

Ezra Klein’s Keynesianism

Ezra Klein attempts once again to defend Keynesian fiscal stimulus in today’s Washington Post, because despite a 9.2 percent unemployment rate, he remains a true believer. He starts by attempting to shoot down the opposition to Keynes’s policy prescription expressed in Young Guns, a book by Reps. Eric Cantor, Paul Ryan, and Kevin McCarthy. According to Klein, the congressmen believe that Keynesianism says “government can be counted on to spend more wisely than the people.”

Keynesianism does not say that, as Klein notes. But what Keynesianism does say is just as wrong, and the reasons are not all that complicated.

As Klein lays it out, Keynes and his follows argued the following three points. First, markets are generally self-correcting. This, in itself, is a welcome confession.

Second, occasionally recessions happen. Economies are subject to a “convulsive downturn” sufficient to overwhelm the markets’ self-correcting mechanisms and instead cause downward forces to feed on themselves, what Klein calls a “destructive feedback loop.”

This leads to the policy prescription as Klein describes it: In that situation, the role of government is to break the cycle. Because businesses and consumers have stopped spending, the government breaks the cycle by spending.

Simple enough, what can be wrong with that? Answer: It only appears to work, because the theory is incomplete.

Keynesian stimulus theory ignores a simple question: Where’d the money come from? Government borrows it. If government borrowing goes up, somebody somewhere in the economy who would have spent it on something, can’t. Total spending doesn’t change, only the label on the spending. What would have been private investment or private consumption is crowded out in favor of government spending.

The lesser danger of Keynesian policy is that it doesn’t work, which means policymakers ignore policies that would help. The greater danger of Keynesian stimulus is that, as we have seen — big time — government debt soars. And, relatedly, it diminishes the traditional resistance to running big deficits year after year. After all, proponents say, it’s stimulus; it creates jobs. But they’re wrong.

J. D. Foster is the Heritage Foundation’s Norman B. Ture senior fellow in the economics of fiscal policy. 


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