When Donald Trump termed his tax and spending proposals “priming the pump,” we came full circle. Fifty-seven years after John Kennedy’s inauguration and 46 after Richard Nixon said, “I am now a Keynesian” a Republican president stated he was following the ideas of the long-dead British economist long associated with liberal economic policies.
True, Trump didn’t say “John Maynard Keynes.” But the term “pump priming” is as specific to Keynesian thought as “surplus value” is to Marxism. The idea is that deficit spending and looser money can get a stalled economy moving again.
It is a short-term policy that takes no account of longer-term incentives for savings and investment. It also assumes a degree of naiveté on the part of consumers and taxpayers. In other words, it represents everything the GOP ostensibly has opposed for 40 years and that was, at least temporarily, swept away by the “rational expectations revolution” within economics as an academic discipline.
Ironically, Trump said this just before the announcement that new claims for unemployment hit the lowest weekly level since 1988, when the population was 70 million lower. By most key economic indicators, the economy is expanding well, exactly the opposite of when fiscal stimulus would be called for.
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History is instructive. Doctrinaire economics always opposed any government “interference” in the economy. But the economic implosion of the Great Depression shook this certainty. In 1936, Keynes’s “General Theory of Employment, Interest and Money” argued that the self-correcting free market functioned in some situations, but not in all. There was room for government to improve on the market when economies fell into recession.
The prescription was to cut taxes and increase spending when faced by recession, together with a central bank increasing the money supply and thus lowering interest rates. When the economy boomed, do the opposite — tax increases, spending cuts, tighter money and higher interest rates.
The Franklin Roosevelt administration never officially adopted these ideas and actually threw the economy back into recession in 1938 with an ill-timed effort to balance the budget. But all the rules were thrown to the wind once World War II broke out and then culminated with United States having an enormously larger economy then it did before the war.
Democrat Harry Truman and Republican Dwight Eisenhower, both budgetary hawks, worked to reduce war debts. The economy grew, but some thought we could do much better. These included Walter Heller, an economics professor who advocated active Keynesian policies to smooth out growth and who became Kennedy’s economic guru.
Heller was as close to a rock star as any economist has ever come. On the cover of Time and other prominent magazines, interviewed daily, he was the face of the “new economics.”
The 1960s economy expanded. Millions of baby-boomers hit the labor force, and the government spent billions on space exploration, the cold war and Vietnam. Output burgeoned, employment grew. Despite social and political unrest, the 1960s were the strongest years of economic growth in the last seven decades. Keynesianism reigned supreme.
There was dissent from Milton Friedman and other “monetarists.” And many Republicans retained suspicion of “government interference.”
So when Richard Nixon announced his Keynesian approach, many Republicans heard apostasy. But it was the prevailing wisdom.
Inept management of the money supply by Arthur Burns, Nixon’s own appointee to head the Federal Reserve, discredited Keynesian policies with high inflation. Alternately stepping on economic gas and brake pedals to speed or slow the economy seemed to bring higher levels of both inflation and recession, an outcome termed “stagflation.”
Within economics, a younger cohort looked at what would happen under the most accepted ideas of how individual humans make decisions. They concluded Keynes’ ideas held fatal flaws. Their “rational expectations” critique rapidly gained acceptance within the discipline.
At a fringe of economics, a few critiqued Keynes differently. They argued that he ignored factors that influenced production, such as the disincentives to saving and investment posed by high marginal tax rates or by complex regulation. These “supply-side” economists never were important in academic economics, but one, Arthur Laffer, caught the attention of politicians with the seductive argument that tax cuts would pay for themselves — an argument the Trump administration makes today..
Up to that point, few economists of either political party disagreed with the general ideas of the supply-siders. High marginal tax rates can be a disincentive to saving. Ill-designed regulation can reduce economic efficiency. But no reputable economist buys the argument that cutting income tax rates will so spur output that tax revenues will actually rise.
This is not a left-right issue. Some of the harshest critics of this fallacy are on the conservative side of the disciplinary spectrum and among those most harshly critical of Keynesian ideas.
Ironically, an idea that was broadly rejected by economists became the core of the contemporary GOP economic program. Keynesianism was bad, supply-side economics was good, and that meant self-paying tax cuts. No Republican since 1980 has echoed Nixon. Nor has Trump in so many words, but to use the “pump-priming” metaphor says the same thing.
The Democrats have been consistent, even if oblivious. They always liked government managing the economy. Whether they cite his name or not and whether they understand the degree to which ongoing economic research has undermined Keynes’ theories, Democrats are Keynesians in economic policy.
And now we have a president, his secretary of the Treasury, and his key economic adviser, all touting a big tax cut because it will boost overall demand — spending by households and businesses. That is Keynes, circa 1936. What goes around in economic policy apparently comes back around six decades later.
St. Paul economist and writer Edward Lotterman can be reached at email@example.com.