Why Yesteryear's Economic Policy is Failing: Decades of Gov't Debt, Spending, & Monetary Expansion


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:

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  1. Unemployment has exceeded 8 percent for 41 months.

    Yeah, but Romney had money in foreign investments, which is the most important POTUS consideration ever!

    1. Dogs on the roof! Dogs on the roof!

      1. Magic underwear!

  2. That jsut makes a ll kinds of sense dude. Wow.


  3. I've never seen that portrait of Keynes. The man had a VERY punchable face.

  4. Monetary or Fiscal stimulus may have worked even with high levels of government debt if it were not for another factor, specifically the people themselves have morphed from a nation of savers to a nation of borrowers. If there were significant net reserves of saved capital then in theory either type of stimulis could have drawn that money out into the economy and boosted growth. Problem is no such reserve exists because at about the same time government spending began accelerating so did private consumption.

    Now of course even this is partly the result of those same government spending practices. First low interest rates discourage saving and encourage debt for obvious reasons, second the presence of a comprehensive safety net that at the time looked invincible convinced baby boomers that they didn't need to save for a rainy day, if anything bad happened the government would be there to pick up the pieces.

    In the end the effect has been to chew through our accumulated assets as an entire society by living beyond our means and we have now reached the point where pretty much all the wealth existing has it's value supported solely by someone elses debt and so there is no spare money anywhere from which to create new production.

    What is the solution? Well there isn't one. Sure they could inflate another bubble or two and kick the can down the road another generation or maybe even 2 but eventually we will have to take our medicine and reduce our standard of living as a society.

  5. I thought people went on cocaine jags. Benders only involve alcohol.

    1. I think it is a cultural thing different among different people and regions.

      For example in the 1967 movie "Barefoot in the park" Jane Fonda's character tells Robert Redford's character that she "gets stoned" when it is obvious that she means she gets drunk.

  6. I am currently reading Hazlitt's Failure of the "New Economics". It is a chapter-by-chapter, paragraph-by-paragraph critique of Keynes' General Theory. Keynes' theories were ambiguous, self-contradictory, and fallacious. How this ridiculous economic philosophy came to be the guiding economic philosophy in the USA is beyond me. Keynes sucks.

    1. "Keynes was a great economist. In every discipline, progress comes from people who make hypotheses, most of which turn out to be wrong, but all of which ultimately point to the right answer. Now Keynes, in The General Theory of Employment, Interest and Money,set forth a hypothesis which was a beautiful one, and it really altered the shape of economics. But it turned out that it was a wrong hypothesis. That doesn't mean that he wasn't a great man!" ? Milton Friedman

      1. Adam Smith was wrong about absolute trade advantage....and the left still use that bullshit to argue against trade.

        Adam Smith was a great economist.

        I don't hate Keynes. He is dead and we cannot say what he would say about his theory today after his theories have been put in practice and have failed so terribly.

  7. The monetarists did not advocate this style of stimulus. While still lost in the delusion that is called "macroeconomics", nonetheless the standard monetarist prescription for a slump is NOT a massive expansion of the monetary base that's tied to a interest rate that keeps those expansions from being lent.

    Of course some monetarists are statists and a few are libertarian. The most famous of them, Milton Friedman, was a libertarian. In the end even he said it was time to end the Fed.

  8. People tend to forget the Keynes advocated deficit spending during lean years AS WELL AS "austerity measures" during the fat years. One would make up for the other to smooth things out, so the theory goes. Politicians all love the spending part, but they hate taking their medicine, or eating their vegetables, or whatever Nancy Pelosi calls it.

  9. Imagine that the country had adhered to its balanced-budget tradition before the crisis.

    First, to be a nitpicking curmudgeon, "the country" does not do anything. Politicians and members of the political class take actions. Or, if you want to talk in aggregates, then: Imagine that the thug-state had adhered to its balanced-budget tradition before the crisis.

    Second, the "tradition" of balanced budgets was not some cultural norm or some expression of underlying preferences. It was something that politicians had to do in order to keep the gravy train running. By Nixon, when the US economy was so big relative to the rest of the world, and when the dollar had become so valuable in and of itself - without need of reserve backing - then deficits and inflation became easy political choices. Of course, such a windfall could not last forever and, after giving in to the urge to produce magic dollars, the consequences of the results of debasement are what are now biting.

  10. Keynes's memory is dishonored more by his disciples than his detractors. JMK was hip to the scam in his younger days:

    "Lenin is said to have declared that the best way to destroy the Capitalist System was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security, but at confidence in the equity of the existing distribution of wealth. Those to whom the system brings windfalls, beyond their deserts and even beyond their expectations or desires, become "profiteers,", who are the object of the hatred of the bourgeoisie, whom the inflationism has impoverished, not less than of the proletariat. ...the process of wealth-getting degenerates into a gamble and a lottery."

    "Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose."

    The Economic Consequences of Peace, 1920

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