Keynesian Cons: Much as the Supply-Siders Rail against Economic Stimulus, They Buy the Basic Argument

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KEYNESIAN ECONOMICS is back. Government spending to stimulate the economy is all the rage and has won the day in Congress. Of course, conservatives are uneasy. "It's hardly a secret that Obama is a Keynesian and that he is staggeringly untroubled by the consistent failures of Keynesian policy before and since the New Deal," David Limbaugh writes at Townhall.com. Dick Morris and Eileen McGann add, "There are very few economists who really buy into Keynesian theory anymore. Instead, the idea of 'rational expectations' has taken its place. The difference between the two approaches is essential to understanding why Obama's stimulus package won't work."

Indeed, you would be hard-pressed to find a conservative who admits to being an orthodox Keynesian, conservatives having joined the Church of the Supply Side many years ago. But though Keynesianism tends to be associated with big-government "liberalism"--in its original form, liberalism stood for small government in all realms--many who take Keynes's approach to economics are nevertheless self-identified conservatives. In practice, "conservative Keynesian" is not a contradiction in terms.

What is a conservative Keynesian? While there may not be a formal definition--mainstream Keynesianism has many nuanced variations--it is fair to say that a conservative Keynesian 1.) looks at the world in terms of macroeconomic aggregates, that is, total output, total employment, and most especially aggregate demand; 2.) sees government fiscal policy as a way to improve those aggregates; and 3.) embraces or at least tolerates deficit spending and inflation in the short run. That much is pretty close to standard Keynesianism. What makes one a Keynesian of the Right is a preference for tax cuts over government spending, although the intention is the same: to put money into the hands of consumers as a way to increase aggregate demand during recessions.

George W. Bush was a model conservative Keynesian. After 9/11, he urged us to shop to keep the economy from falling into a recession. He was also responsible for the 2008 tax rebate--remember those $300 stimulus checks?--which was based on the theory that putting money into people's hands would boost consumer spending and nip recession in the bud. (It didn't.)

An astonishing number of the Republicans' most cherished economic thinkers can be called Keynesians. According to Austrian economist Murray Rothbard, former Fed chairman Alan Greenspan "is, like most other longtime Republican economists, a conservative Keynesian, which in these days is almost indistinguishable from the liberal Keynesians in the Democratic camp. In fact, his views are virtually the same as Paul Volcker, also a conservative Keynesian. Which means that he wants moderate deficits and tax increases, and will loudly worry about inflation as he pours on increases in the money supply."

Another of these influential Republican economists is Martin Feldstein, a Harvard professor of economics who was President Reagan's chairman of the Council of Economic Advisers. While Feldstein was a critic of the growing deficit in the Reagan years, today he supports government spending to promote economic recovery. Writing in the Washington Post in October 2008, Feldstein argued that falling home prices are "causing consumers to cut spending, leading to lower employment, lower incomes, and further cuts in consumer spending. Other components of aggregate demand are also falling. The decline in consumer spending will lead to less business investment in plants and equipment."

Tax cuts wouldn't work, he said: "The only way to prevent a deepening recession will be a temporary program of increased government spending.... A fiscal package of $100 billion is not likely to be large enough to revive the economy." In true Keynesian fashion, he added, "While it would be good if some of the increased spending also contributed to long-term productivity, the key is to stimulate demand. …