Lake Wobegon Keynesians
The Keynesian view of fiscal policy is an ever-changing theory. In the 1960s, it was believed that fiscal stimulus was needed during recessions. In the 1990s, Keynesians argued that fiscal policy was not an appropriate stabilization tool, rather monetary policy should be employed. Then after 2008, Keynesians suggested that fiscal policy was OK, but only when the economy was at the zero bound. And now even that qualifier is being gradually phased out.
Keynesians also insist that the stance of fiscal policy depends on the change in the cyclically adjusted deficit, not the level of the deficit in absolute terms. In other words, it would be impossible to run a continually expansionary fiscal policy. For every year of expansionary fiscal policy, there will be another year of contractionary fiscal policy.
If the Keynesians are right that it’s the change in the deficit that matters, then you’d obviously want to do fiscal stimulus when unemployment is high, and fiscal austerity when unemployment is low. So is that what Keynesians actually do recommend? Apparently not—here’s the Economist:
With total revenues of C$300 billion, the federal government’s capacity to lift the C$2 trillion economy is limited. The budget’s impact will be modest, says Craig Alexander of the C.D. Howe Institute, a think-tank. Still, most economists support deficit spending at a time when borrowing rates are low and the economy is weak. The question is: will Mr Trudeau know when to stop?
As far as “when borrowing rates are low”, that would be the next 100 years, wouldn’t it? Are we to have fiscal stimulus for the entire 21st century? The Keynesians say that’s impossible, what matters is whether the deficit is bigger or smaller than normal. So how about the timing? Here’s the unemployment rate in Canada:
It ticked up slightly in recent months, due to a slow patch in the first half of 2015. But Canada is expected to grow again this year. If no recession, then why do fiscal stimulus? And “will Mr Trudeau know when to stop?” Let me guess, right before the next big recession.
And why not cut interest rates instead? There are no good answers from Keynesians, just mumbles about the “need” for infrastructure, or the worry about “bubbles”. Yes, but what does any of that have to do with countercyclical fiscal policy? They have no answers.
Canada has a done a better job than most countries in holding down its public debt. And now it’s going to just throw those hard-earned gains away, for no good reason at all.
Some Keynesians seem to be like those deluded residents of Lake Wobegon, believing that fiscal policy can always be more expansionary than average.
And if you think things are bad in Canada, consider that in America many Keynesians favor fiscal stimulus, even with unemployment at 4.9%. What will they advocate when the next recession hits? Even more fiscal stimulus?