The first fundamental failure of Keynesian economics occurred forty years ago during the Vietnam War when the economy was overheating but the political system failed to take the corrective steps that would restrain price inflation—that is, raise taxes and reduce federal spending. The decade of economic stagnation that followed became a central factor in discrediting both liberalism and the Democratic Party.
We are now witnessing a second great failure of the doctrine John Maynard Keynes devised for managing a healthy economy. This time, Washington faces the opposite problem—a starkly underperforming economy in which 10 percent of the workforce are without jobs and income. Yet the President and Democratic Congress, spooked by the swollen federal deficits, are unwilling to do what Keynes prescribed in these circumstances—pump up federal spending enormously and run even larger budget deficits in order to force-feed a stronger recovery.
The results of this political decision will be tragic for millions of struggling families, but also potentially devastating for the Democratic party. Democrats are implicitly choosing to do nothing more to rescue the country from the deepening dislocations and lost output. Making mistakes can be forgiven, but not giving up.
The president and his lieutenants have evidently decided they have already done enough. Indeed, they keep reminding us they saved the country from something worse. Millions withhold their congratulations, since something worse is what they are now experiencing. The losses will last longer and multiply more widely so long as Washington declines to act more forcefully. Americans who never heard of Keynes will make their own judgments about whom to blame.
This represents a failure of politics, not of the Keynesian logic. But the distinction hardly matters to ordinary folks. If the political system can never find the stomach to deliver the hard medicine that Keynes prescribes, what good is the doctrine for governing? The political order failed Keynes on the upside in the sixties—unwilling to restrain an over-stimulated economy. Now politicians are failing Keynes on downside—declining to force-feed the injured economy when it desperately needs government’s help.
Years ago, the late John Kenneth Galbraith explained why politicians did not act against incipient inflation back in the late sixties when Lyndon Johnson was president. "An increase in taxes at a time when prices are rising appears to all but the most enlightened citizens as a peculiarly gratuitous action," Galbraith wrote. "‘More is being paid for goods: now the government adds insult to injury with higher taxes."
This time, Barack Obama will not have good excuses. If the economy slips back into recession or simply stagnates for many years, forfeiting potential production, jobs and incomes, the president will rightly be the goat. Deficits are the cure, not the disease, as many of us have been writing for months. It’s true the red ink upsets people who cluck and express alarm. But no political party ever lost a national election on the deficit issue. Ronald Reagan’s feel-good deficits made the opposite point.
Obama’s governing problem is that he tries to have it both ways. His presidency started with stimulus spending, but far short of what even some of his own economists said would be needed. Then the president swiftly took up the other side of the argument and joined the chorus of deficit hawks, bemoaning the red ink and promising to do something about it (like maybe by cutting Social Security?).
Obama, instead of making the case for continuing stimulus with clarity and conviction, sends cloudy mixed signals. The White House makes cozy with Blue Dog Democrats and right-wing Republicans. The president refused to give strong instructions to Congress and, not surprisingly, nervous members of Congress took this as permission for them to duck too. The net effect will be emasculated stimulus legislation, too trivial to do much of anything for the economy.
Obama’s economic strategy turns out to be closer to Herbert Hoover's than to Franklin Roosevelt's. You cannot really tell from presidential speeches whether he adheres to Keynes or the "old-time religion" preached by balanced-budget conservatives. Maybe that could change if the economic numbers suddenly turn negative, but it is already too little, too late. The president looks to be under the influence of stale bromides—the thinkers Keynes once derided as "defunct economists."