How to do Deficit Spending or The Trouble with Keynesianism

The prescriptions of John Maynard Keynes have been controversial since his time:  the idea of deficit spending for “priming the pump,” the idea of the “paradox of thrift,” and others that seemed to go contrary to traditional financial virtues.  Many have blamed John Maynard Keynes, in fact, for the fact that America’s national budget is usually in a state of deficit.  It’s a bit more complicated than that.

Keynes never advocated deficit spending in times of prosperity.  The trouble with his theory was not so much economic as political; since the state must cut back its spending in times of prosperity, who volunteers to be the thing on which the state spends money in hard times but cuts off money in good times?  [Ominous silence.]  I didn’t think so.  So, while I would hold that deficit spending in times of recession is legitimate, there are only two types of things that I would spend deficit money on:

  1. Unemployment insurance.  Assuming that a “recession” or “depression” is defined mainly as a period of high unemployment, deficit money can be spent on unemployment insurance, because the amount of money spent will automatically decrease if the economy pulls out of recession.  Other forms of welfare that do not vary much with the unemployment rate, such as welfare [including Social Security, food stamps, and the like] and health care, must be covered by tax money.
  2. Infrastructure projects, of the kind that have a defined completion.  These are also the kind that politicians like, because they can have ribbon cuttings at the end and have their pictures taken.  Unfortunately, we are short now in America on maintenance of existing infrastructure.  And maintenance of existing infrastructure is a never ending thing.  It is said, for example, that as soon as they finish painting the Golden Gate Bridge, they start over again.  Because of this, maintenance of infrastructure needs to be paid for by higher taxes, if necessary, not by deficit spending.

If deficit spending is devoted exclusively to things of these two types, it should not have to be a permanent phenomenon, as it has become, but as Keynes never intended it would be.

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