The Keynesian Model is not a Big Government or Small Government Model

Alan pointed out that that would lead to a small-government bias in Keynesian policy.

But the bias toward big government in Keynesian policy comes from the self serving way politicians implement it, why wouldn’t they do the same with your version?

@Andrew_FL,
But the bias toward big government in Keynesian policy comes from the self serving way politicians implement it, why wouldn’t they do the same with your version?
You’re right that they have that self-serving bias. How could they do that with my version?

Andrew_FL –
Yep, that’s the ambiguity. And of course most Keynesians wouldn’t think of themselves as being discretionary they think of themselves as rule-based (indeed in the realm of monetary policy a Taylor Rule!).

I think there’s a different reason for the correlation between Keynesianism and big-government support. The motivating theoretical assumptions of Keynesian macro have to do with market failure: sticky wages and prices and liquidity traps. Markets don’t heal themselves and need management. That view appeals to those generally skeptical of markets.

Also, a really small government simply wouldn’t have the capacity to do fiscal aggregate demand management. Imagine the federal government were as small as that in 1900, spending and taxing about 3% of GDP. Abolishing all federal taxes would only be a fiscal stimulus of 3% of GDP. Increasing government spending by only 3% of GDP would double the spending-revenue ratio and raise the possibility of default.

@David R. Henderson-As would I, but 3% is the figure for 1900 for the Federal government. With state and local it’s almost 8%.

Am I right in assuming that in the following passage:

“If the government raises taxes during booms and lowers them during busts, or decreases government spending during booms and reduces government spending during busts, there is no built-in growth of government from following the policy implications of the Keynesian model.”

that the “reduces government spending during busts” should read “increases government spending during busts”?

That would be my understanding of a counter-cyclical policy.

@Bob Gillette,
Good catch. Thanks. Correction made.

@ Greg G.

Ah, but then, what is “counter-cyclical?? and what is “policy?” 🙂

Does “policy” mean departing from an NPV rule? When? Or does it mean modifying the NPV to account for differences between market prices and marginal costs/revenues?

ThaomasH,

I see your point. These are good questions.

My own sense is that Keynes was ultimately more worried about unemployment than anything else. But of course that raises the question of how much unemployment is too much.

If you could convince me that it [the Keynesian model] worked in a technical sense, I’d immediately favor tax cuts in recessions and tax increases in booms.

I’m pretty sure Keynes would reject that policy as stupid and totally missing the point.

How can that kind of policy effect Keynes most emphatic prescription:

I feel sure that the demand for capital is strictly limited in the sense that it would not be difficult to increase the stock of capital up to a point where its marginal efficiency had fallen to a very low figure. This would not mean that the use of capital instruments would cost almost nothing, but only that the return from them would have to cover little more than their exhaustion by wastage and obsolescence together with some margin to cover risk and the exercise of skill and judgment. In short, the aggregate return from durable goods in the course of their life would, as in the case of short-lived goods, just cover their labour costs of production plus an allowance for risk and the costs of skill and supervision.

Now, though this state of affairs would be quite compatible with some measure of individualism, yet it would mean the euthanasia of the rentier, and, consequently, the euthanasia of the cumulative oppressive power of the capitalist to exploit the scarcity-value of capital. Interest today rewards no genuine sacrifice, any more than does the rent of land. The owner of capital can obtain interest because capital is scarce, just as the owner of land can obtain rent because land is scarce. But whilst there may be intrinsic reasons for the scarcity of land, there are no intrinsic reasons for the scarcity of capital. An intrinsic reason for such scarcity, in the sense of a genuine sacrifice which could only be called forth by the offer of a reward in the shape of interest, would not exist, in the long run, except in the event of the individual propensity to consume proving to be of such a character that net saving in conditions of full employment comes to an end before capital has become sufficiently abundant. But even so, it will still be possible for communal saving through the agency of the State to be maintained at a level which will allow the growth of capital up to the point where it ceases to be scarce.

I see, therefore, the rentier aspect of capitalism as a transitional phase which will disappear when it has done its work. And with the disappearance of its rentier aspect much else in it besides will suffer a sea-change. It will be, moreover, a great advantage of the order of events which I am advocating, that the euthanasia of the rentier, of the functionless investor, will be nothing sudden, merely a gradual but prolonged continuance of what we have seen recently in Great Britain, and will need no revolution.

Thus we might aim in practice (there being nothing in this which is unattainable) at an increase in the volume of capital until it ceases to be scarce, so that the functionless investor will no longer receive a bonus; and at a scheme of direct taxation which allows the intelligence and determination and executive skill of the financier, the entrepreneur et hoc genus omne (who are certainly so fond of their craft that their labour could be obtained much cheaper than at present), to be harnessed to the service of the community on reasonable terms of reward.

The high tax rates and numerous tax dodges that Milton Friedman criticized were pretty good tax policies to accomplish what Keynes advocates to harness “the intelligence and determination and executive skill of the financier, the entrepreneur et hoc genus omne” for the good of the community.

Tax dodging has generally required significant employment of labor in excess of the taxes dodged. For example, to dodge a 50% corporate tax, you must pay 50% of the labor cost to build productive capital like R&D, machines, new employee training to get the immediate deduction of expense, instead of waiting to depreciate the capital to deduct the cost of capital.

Milton Friedman criticized the tax policies of high tax rates and lots of tax dodges as promoting hiring too many workers, paying too much in labor costs, and investing too much in capital, especially in the excessive drill baby drill that led to the 1970 peak oil production in the US, followed by decades of decline (until Obamanomics tricked investors into destructive investment in drill baby drill that euthanized the rentier, monopolist, and functionless investor, and doomed the coal industry).

Keynes would love a carbon tax that was set to rise fairly rapidly over two decades because it would euthanize the pillage and plunderers of capital with high tax and promote so much investment in capital that the rentier et al would be euthanzied, without raising much if any tax revenue. And as Trump would say, “there would be so much employment and so much consumer spending, you would be begging for unemployment so you can spend time watching TV in your solar house and drive around in your electric car and drive into the mountains to see the clear blue sky and the forest of gorgeous wind turbines offshore.”