We’re all stuck being Keynesians now, thanks to coronavirus aid bills and Fed lending

It looks like we are all Keynesians now, even if we don’t have it right.

In response to the coronavirus pandemic and associated government shutdown of businesses, policy makers have responded with a large dose of Keynesian economic policy.

In 1965, Time magazine ran a piece with the title “We Are All Keynesians Now.” The article showed the growing acceptance of this economic theory. “First the U.S. economists embraced Keynesianism, then the public accepted its tenets. Now even businessmen, traditionally hostile to government’s role in the economy, have been won over.”

It’s not clear, however, that the famous economist who suggested that government spending be used to mitigate business cycles would support the current actions.

John Maynard Keynes’ treatise, “The General Theory of Employment, Interest and Money,” included as part of an overall theory of the business cycle the idea that if employment was high and inflation low, the government should spend less and reduce debt. This hasn’t happened during the “good times” of these past few years, or for that matter, much at all since 1965.

Keynes may have chastised us for not being prepared for this COVID-19 crisis. Furthermore, his theory supported government spending programs but never called for the extraordinary monetary policies now being proposed.

The Federal Reserve announced last week that it will not only keep interest rates near zero but also lend directly to businesses, large and small. The new programs will even buy corporate debt rated “junk” by the rating agencies, meaning a high expected rate of default. This looks like a bailout.

Not only has Keynesian theory not been followed, but a number of economists argued when the theory was first proposed that the associated policies would never achieve the predicted results.

Ludwig von Mises argued that any type of intervention in the economy is inherently unstable. Fiscal spending and monetary stimulus programs create “dislocations” in the economy that eventually lead to calls for further interventions. The Fed’s new lending program is likely to misdirect capital, creating economic instability.

Economist Henry Hazlitt argued that Keynes’s model itself was flawed. Hazlitt showed that such spending never actually increases incomes or creates more jobs. Such policies only redistribute current income and wealth, and the bureaucracy that comes along with such programs leads to a net loss for society.

So, either the theory has been misapplied or misinterpreted. While some may like the government assistance today, we should all expect less stable economic conditions and slower overall growth going forward.

We’re all stuck being Keynesians for now.

Peter Crabb is a professor of finance and economics at Northwest Nazarene University in Nampa. prcrabb@nnu.edu