Democracy in Deficit: The Political Legacy of Lord Keynes

At this point, values cannot be left aside. If the Keynesian policy precepts for national economic management have failed, there are two ways of reacting. We may place the blame squarely on the vagaries of democratic politics, and propose that democratic decision making be replaced by more authoritarian rule. Or, alternatively, we can reject the applicability of the policy precepts in democratic structure, and try to invent and apply policy principles that are consistent with such structure. We choose the latter.
*2 Our values dictate the democratic decision-making institutions should be maintained and that, to this end, inapplicable economic theories should be discarded as is necessary. If we observe democracy in deficit, we wish to repair the “deficit” part of this description, not to discard the “democracy” element.

A Review of the Record

We challenge the Keynesian theory of economic policy in this book. Our challenge will stand or fall upon the ability of our argument to persuade. There are two strings to our bow. We must first review both the pre-Keynesian and the post-Keynesian record. Forty years of history offers us a basis for at least preliminary assessment. We shall look carefully at the fiscal activities of the United States government before the Great Depression of the 1930s, before the publication of Keynes’
General Theory.*3 The simple facts of budget balance or imbalance are important here, and these will not be neglected in the discussion of Chapter 2. More importantly for our purposes, however, we must try to determine the “principles” for budget making that informed the political decision makers. What precepts for “fiscal responsibility” were implicit in their behavior? How influential was the simple analogy between the individual and the government financial account? How did the balanced-budget norm act to constrain spending proclivities of politicians and parties?

There was no full-blown Keynesian “revolution” in the 1930s. The American acceptance of Keynesian ideas proceeded step by step from the Harvard economists, to economists in general, to the journalists, and, finally, to the politicians in power. This gradual spread of Keynesian notions, as well as the accompanying demise of the old-fashioned principles for financial responsibility, is documented in Chapters 3 and 4. The Keynesian brigades first had to storm the halls of ivy, for only then would they have a base from which to capture the minds of the public and the halls of Congress. Chapter 3 documents the triumph of Keynesianism throughout the groves of academe, while Chapter 4 describes the infusion of Keynesianism into the general consciousness of the body politic—its emergence as an element of our general cultural climate.

Even if our review of the historical record is convincing, no case is established for raising the alarm. What is of such great moment if elected politicians do respond to the Keynesian messages in somewhat biased manner? What is there about budget deficits to arouse concern? How can the burden of debt be passed along to our grandchildren? Is inflation the monster that it is sometimes claimed to be? Why not learn to live with it, especially if unemployment can be kept within bounds? If Keynesian economics has and can secure high-level employment, why not give it the highest marks, even when recognizing its by-product generation of inflation and relatively expanding government? These are the questions that require serious analysis and discussion, because these are the questions that most economists would ask of us; they are explored in Chapter 5.

The Theory of Public Choice

Our second instrument of persuasion is a theory for decision making in democracy, a theory of public choice, which was so long neglected by economists. This is developed in Chapters 6 through 9. Keynes was not a democrat, but, rather, looked upon himself as a potential member of an enlightened ruling elite. Political institutions were largely irrelevant for the formulation of his policy presumptions. The application of the Keynesian precepts within a working political democracy, however, would often require politicians to undertake actions that would reduce their prospects for survival. Should we then be surprised that the Keynesian democratic political institutions will produce policy responses contrary to those that would be forthcoming from some idealized application of the norms in the absence of political feedback?

In Chapter 7, it is shown that ordinary political representatives in positions of either legislative or executive authority will behave quite differently when confronted with taxing and spending alternatives than would their benevolently despotic counterparts, those whom Keynes viewed as making policy, whose behavior is examined in Chapter 6. In Chapter 8, the analysis of Chapter 7 is extended to the behavior of monetary authorities, and monetary decisions are considered as endogenous rather than as exogenous variables.

A crucial feature of our argument is the ability of political and fiscal institutions to influence the outcomes of political processes, a subject that we explore in Chapter 9. Institutions matter in our analysis. While this position is generally accepted by those who call themselves “Keynesians,” it is disputed by many of those who consider themselves “anti-” or “non-Keynesians.” These latter analysts argue that institutions are generally irrelevant. With respect to institutions, we are like the Keynesians, for we do not let an infatuation with abstract models destroy our sense of reality. Instead, we accept the proposition that institutions, like ideas, have consequences that are not at all obvious at the time of their inception, a point that Richard Weaver noted so memorably.
*4 At the same time, however, our view of the nature of a free-enterprise economic order is distinctly non-Keynesian, although “Keynesianism” must to some extent be distinguished from the “economics of Keynes.”
*5

The theory of public choice discussed in Chapters 6-9 is not at all complex, and it offers satisfactory explanations of the post-Keynesian fiscal record. The Keynesian defense must be, however, that the theory is indeed too simplistic, that politicians can and will behave differently from the predictions of the theory. We do not, of course, rule out the ability of politicians, intelligent persons all, to learn the Keynesian lessons. But will the voters-citizens, who determine who their political representatives will be, accept the proffered wisdom? This is a tougher question, and the familiar call for more economic education of the public has long since become a tiresome relic. The Keynesian who relies on a more sophisticated electorate to reverse the accumulating record leans on a frail reed.

Fiscal and Monetary Reform

In the last three chapters of the book, we return to what may be considered the main theme. Even the ardent Keynesians recognized, quite early, that some replacement for the fiscal rule of balanced budgets might be required as guidance for even the enlightened politicians. In Chapter 10, we examine the alternative rules for fiscal responsibility that have been advanced and used in the discussion of fiscal and budgetary policy. These include the rule for budget balance over the business cycle, and, more importantly, the rule for budget balance at full employment which continues to inform the official economic pronouncements from Washington, even if it is largely disregarded in practice.

Chapter 11 represents our response to what will seem to many to be our most vulnerable point. What about unemployment? Our criticism of the implications of the Keynesian teachings may be widely accepted, up to a point. But how are we to respond to the argument that the maintenance of high-level employment is the overriding objective for national economic policy, and that only the Keynesian teachings offer resolution? These questions inform this chapter, in which we question the foundations of such prevalent attitudes.

Chapter 12 offers our own substantive proposals for fiscal and monetary reform. Our emphasis here is on the necessity that the reforms introduced be treated as genuine constitutional measures, rules that are designed to constrain the short-run expedient behavior of politicians. Our emphasis here is in the long-range nature of reform, rather than on the details of particular proposals. To avoid charges of incompleteness and omission, however, we advance explicit suggestions for constitutional change, and notably for the adoption of a constitutional amendment requiring budget balance.