Over at The Wash Post, columnist Robert Samuelson helpfully lays out why economic policy seems incapable of bringing us out of the Great Recession or Great Slowdown or whatever we want to call at least the past 40-odd months of glorious hope and change. And it's worth reminding ourselves that from both basic Keynesian and monetarist stimulus angles, we should have seen more than a few phony "green shoots" by now. It's not as if the Treasury and the Fed haven't been stimulating things like porn-star fluffers, after all. Instead, what might be called the Stimulatarians of the Right (monetarists) and of the Left (Keynesians) argue that we haven't created or spent enough money yet.
Samuelson follows up on the insights of his terrific post-war economic history, The Great Inflation and Its Aftermath, to argue that "we are still paying the price for the greatest blunder in domestic policy since World War II." For many decades—and most important, the decades during which both classic monetarist and Keynesian theory was first developed—governments hewed pretty much to balanced budgets. That hasn't been the case for decades and, says Samuelson, it helps explain why those theories seem ineffective now. They were developed for significantly different circumstances. Specifically, in worlds in which the government hadn't long been engaged in massive borrowing sprees or years-long actions to keep interests rates plainly below what any vaguely market would have delivered. As a result, even if those theories were accurate in explaining past situations (a big if in the case of Keynesianism), this time it's different, like going on a cocaine bender after a week on the town.
Political leaders and average Americans noticed that continuous deficits did no great economic harm. Neither, of course, did they do much good, but their charm was "something for nothing." Politicians could spend more and tax less. This appealed to both parties and the public. Since 1961, the federal government has balanced its budget only five times. Arguably, only one of these (1969) resulted from policy; the other four (1998-2001) stemmed heavily from the surging tax revenue of the then-economic boom.
We are now facing the consequences of all these permissive deficits. The recovery is lackluster. Economic growth creeps along at 2 percent annually or less. Unemployment has exceeded 8 percent for 41 months. But economic policy seems ineffective. Since late 2008, the Federal Reserve has kept interest rates low. And budget deficits are enormous, about $5.5 trillion since 2008….
It didn't have to be this way:
Imagine that the country had adhered to its balanced-budget tradition before the crisis. Some deficits would have remained, but the cumulative debt would have been much lower: plausibly between 10 percent and 20 percent of GDP. There would have been more room for expansion. Balancing the budget might even have forced Congress to face the costs of an aging society.
Read the whole thing here.
ReasonTV interviewed Samuelson about The Great Inflation and Its Aftermath in 2008: