Ezra Klein in his column in this morning’s Washington Post lays out a case for Mitt Romney as Keynesian. Here’s the argument: Romney’s election, which would likely be accompanied by a Republican sweep of both houses of Congress, would end gridlock, restore business confidence (no more debt ceiling threats) and avoid the harsh cuts in spending currently being insisted upon by House Republicans. The argument for the latter is that they wouldn’t want to trigger an immediate sharp recession.
He might have added that Republicans have always been hypocrites when it comes to deficits. They use them when out of office to get elected (average Americans, being economically illiterate, will always and common sensibly believe in balanced budgets), and ignore them when in office. Prior to President Obama (whose large deficits are a function of the magnitude of the economic collapse coupled with the continuation of the Bush era tax cuts and payroll tax cuts as the only acceptable means of stimulating the economy), the two largest deficit spenders in American history (after Franklin Delano Roosevelt during World War II) were President Ronald Reagan and President George W. Bush.
But does that make Republicans (and Romney, assuming he follows in the footsteps of his predecessors) Keynesian? Romney has called for an 8 percent increase in military spending. He is also calling for sharp cutbacks in domestic spending. Klein quotes a Romney interview from earlier this year where he said he wouldn’t immediately cut $1 trillion from the federal budget (the level called for by the sequestration cuts) because it would cause an immediate 5 percent cut in gross domestic product and throw the country into recession. That simply shows Romney’s ignorance on the campaign trail about government budget policy (his advisers know better). The sequestration cuts would be $1 trillion over ten years or about $100 billion in the first year he took office. A $100 billion cut in spending is about a 0.6% (six tenths of one percent) hit to a $16 trillion economy. That would slow the economy’s growth — just as the huge cuts in state and local government spending has dragged down the current economic recovery — but it wouldn’t stop economic growth in its tracks.
But let’s put the two sides of the Republican/Romney plan together: a $150 billion cut in domestic spending coupled with a $50 billion or so increase in military spending (8 percent of a $650 billion Pentagon budget) would dramatically shift the composition of government spending. It would return the government to approximately the military/domestic split last seen at the height of the Cold War in the 1950s. While this may keep the economy going, it is not properly labeled as “Keynesian.”
As Keynes pointed out in a letter to FDR in 1933, governments of all political persuasions and throughout history have been willing to engage in deficit spending on war and war preparation. Lord Keynes wanted to add something new to the equation:
Thus as the prime mover in the first stage of the technique of recovery I lay overwhelming emphasis on the increase of national purchasing power resulting from governmental expenditure which is financed by Loans and not by taxing present incomes. Nothing else counts in comparison with this. In a boom inflation can be caused by allowing unlimited credit to support the excited enthusiasm of business speculators. But in a slump governmental Loan expenditure is the only sure means of securing quickly a rising output at rising prices. That is why a war has always caused intense industrial activity. In the past orthodox finance has regarded a war as the only legitimate excuse for creating employment by governmental expenditure. You, Mr President, having cast off such fetters, are free to engage in the interests of peace and prosperity the technique which hitherto has only been allowed to serve the purposes of war and destruction.
Romney’s plan isn’t Keynesian just as Adolph Hitler’s military spending during the 1930s or the U.S.’s during WWII weren’t Keynesian. When governments spend on preparations for war, it is merely “orthodox finance.”Did you like this? If so, please bookmark it, RSS feed.