The Keynesian Tradeoff: Boost the Economy Now and You'll Slow Growth Later


Even if you buy the broad Keynesian arguments for deficit-funded stimulus, there are inevitably tradeoffs to boosting the economy in the short-run through added government spending. Choices that keep the economy up now will hurt it later. The Congressional Budget Office explains how it sees the choice:

Lawmakers face difficult tradeoffs in deciding how quickly to implement policies to reduce budget deficits. For example, CBO projects that the significant tax increases and spending cuts that are due to occur in January will probably cause the economy to fall back into a recession next year, but they will make the economy stronger later in the decade and beyond. In contrast, continuing current policies would lead to faster economic growth in the near term but a weaker economy in later years. Potential policy changes would have different effects on federal borrowing, people's incentives to work and save, and government investment, all of which would affect the nation's output and income during the next few years and over the longer term.

I don't think you have to be a diehard Keynesian to agree that a rapid contraction of spending cuts and large tax hikes would cause some short-term upheaval in the economy. The important implication from this is that the real damage done by large deficits is in the long-term economic drag they cause. Which suggests that best course of action is not to go ahead with the unplanned expiration of a bunch of tax and spending measures at the end of the year (the fiscal cliff), but to quickly set a sure and steady path to deficit reduction and then actually stick to it. Obviously Congress isn't very good at this. But sooner or later it's going to have to figure out how to do it. 

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  1. But sooner or later it’s going to have to figure out how to do it.

    Give a thousand monkeys some typewriters and you might get better results.

    1. Yeah, I thought that was a bit of an optimistic statement.

      How about 10 monkeys, 5 minutes?

      1. 5 monkeys, 2 bananas, and 3 speech-to-text transcoders

        1. 2 monkeys, 1 banana

            1. god people are stupid. origin of planet of the apes. right there.

              1. Well, yeah, considering it was viral marketing for the movie.

                1. was it? do’h.

      2. One funky brass monkey

    2. “It was the best of times, it was the blurst of times?! Stupid monkey.”

  2. I’m surprised we still go to the CBO for information, knowing that everything they do is constrained by the parameters congress gives them. While lowering the deficit and debt continually will be good for the economy over the long run, income tax hikes are not, ceterus paribus. Income taxes are growth killers (CATO study). A much better solution would be to scrap the income tax, repealing the 16th amendment; find a different way to fund the government, e.g. the land value tax, among other options, and reduce government spending to, IDK, maybe constitutional levels, with a much lower defense budget. People see this study and think it means that tax hikes are good. Someone at my work tried to point to this in exactly that way. We should disabuse them of that notion.

    1. Well as bad as tax hikes are they are not as bad as debt is in the long term so if you can’t cut spending to match income you’re better off hiking taxes than borrowing the difference.

      It also forces the people to actually pay the cost for their government TODAY which puts a lot more pressure to cut spending.

    1. What’s the point of being director of the CIA if you can’t use it as a pickup line?

        1. So his wife is Liz Warren-lite? Maybe he’s not completely to blame here…

          1. She’s worked for the BBB, so she’s used to extorting money out of businesses. She should fit in nicely at the Bureau.

          2. I think his wife’s face is to blame

            1. No shit. That is one ugly woman. I don’t blame the dude.

        2. You can practically see the estrogen draining out as she’s frowning there. Age is unkind to too many women.

    2. Kill American citizens? No problem. Bomb innocent children? No problem. Trip and stick your dick in a new hole? PROBLEM.

      1. A very odd way for a CIA chief to end.

        1. What, taken down by interagency bureaucratic in-fighting? Seems pretty typical.

          Remember, the terrorists are Bad Guys. The other agency across the river? They’re the enemy.

      2. Obama should have just said that lives are on the line here and I need you to keep your job. Sex is not that big a deal in 2012.

      3. Hey Obama administration, it was only about sex.

    3. the rumor that circled DC is that the affair was a with a Elizabeth Warren staffer. no idea if that’s true, but 2 people just called and said the same thing. how a bunch of health care guys know? they heard it somewhere from someone.

  3. He was a good general for trying to get us to NOT treat the Iraqis like American LEOs treat “civilians” – and he was right (respect, communicate, protect and leave alone otherwise). But it looks like that did not carry over to later on.

    1. A theme I’m seeing in Ron Paul’s “A Foreign Policy of Freedom” is the need to commit to and win wars when we declare them. Other generals focused on “force protection” as the end all and be all. It was the same position that Barry Goldwater took on Vietnam: fight to win or get the hell out.

  4. I don’t think you have to be a diehard Keynesian to agree that a rapid contraction of spending cuts and large tax hikes would cause some short-term upheaval in the economy.

    Should that be diehard anti-Keynesian?

  5. CBO projects that the significant tax increases and spending cuts that are due to occur in January will probably cause the economy to fall back into a recession next year, but they will make the economy stronger later in the decade and beyond. In contrast, continuing current policies would lead to faster economic growth in the near term but a weaker economy in later years.

    IOW, the near-term growth is the perfect political solution and the one our masters will choose.

    I swear to Zod, the next regressive that moos about how “businesses never pan for the long term!” is getting punched right in the taint.

  6. The wheels on the bus go round and round.

  7. When things slow down in the future, you just boost things again.

  8. These words you are writing are too complicated for me. Thank the Almighty that the election has resolved all these issues: you fix the economy by seizing the money of people who have more than I do, and giving it to people who have more money than I do but who promise to use it to hire green workers.


    Looks like you skeptics were right about the Lincoln film. It is not really even a bio pic. It is just some preachy liberal tomb about the passing of the 13th Amendment. While Daniel Day Lewis is great, the script is awful and a hopeless bore. What a shame.

    1. The commercials I’ve seen had drooling, inch-deep hagiography written all over it, but that’s par for Hollyweird today and no surprise.

      1. Yeah, that was my default assumption too. It’s possible Daniel Day Lewis still gives a performance worth watching but I think expectations must be kept low.

        What about the Red Dawn remake, though? Thanksgiving week, escape the family and sneak booze into theater-worthy?

        1. Escape the family, smoke a joint in the parking lot and sneak booze into theater-worthy.

        2. i’m going with some friends for that reason.

        3. Daniel Day Lewis was the only thing that made There Will Be Blood even slightly worth watching, and this looks to be an even shittier movie than that. Can’t you just get wasted and throw gasoline on a bonfire like a normal hillbilly?

          1. I liked TWBB but point taken. Is that a traditional hillbilly holiday activity? It sounds kinda fun, preferably if some of EDG’s and my substance-consumption tips are added into the mix.

            1. Burnin’ shit is pretty traditional for all celebrations. Make sure you mix the gasoline half and half with kerosene. For safety.

        4. Yeah but how are we supposed to get all swelled up with patriotic pride when they couldn’t even find an American to play Patrick Swayze?

          Not that I don’t like Thor as an actor but still if you’re gonna remake Red Dawn you could at least get Americans to play the leads.

          1. Does Chris Hemsworth do a half decent American accent at least? I’ve seen him in stuff before but he is too pretty to listen to.

          2. Yeah! Somebody like Topher Grace!

    2. Liberal tomb?

      (I think the word you want is tome).

    3. Jesus, that sounds boring. What was the last good movie Spielberg made? I’m drawing a blank.

      1. 1941…

        1. I LOVE THAT MOVIE.

          It’s big. The biggest one here. You know what else? It’s got a lot of range. You know what I mean by range, don’t you? I mean it can stay up for a long time. A very long time. And it’s built firm and solid. Because it has to be. Because of its tremendous forward thrust. And when this baby delivers its payload… devastating.

      2. Jurassic Park, for all its flaws, was still a groundbreaking (in terms of special effects) and frankly really fun movie, and Amistad was solid.

        1. You didn’t love AI???

          1. Actually, I hated it. Satisfied?!?

            1. But wait, it was terrible and you have no taste. I’m confused.

          2. Automaton sex is for the Japanese and Warty.

      3. I liked ‘The Adventures of TinTin’.

        Also, The Terminal and Minority Report are underrated.

        I honestly don’t like Spielberg’s “best” films, such as Schindler’s List, AI, or Saving Private Ryan.

    4. Oh, John. How I love you misspellings. Although sometimes I think they are intentional. You sly devil.

    5. What the hell do you have against the 13th Amendment?

      Preachy it may be, but I would think libertarians would support a film that focuses on the 13th amendment.

      I admit that yet another film whose subject is “Racism is bad, m’kay!” would be a bit annoying.

      Still I wouldn’t necessarily describe “Slavery is bad, m’kay!” as a “liberal” message.

  10. quickly set a sure and steady path to deficit reduction and then actually stick to it. Obviously Congress isn’t very good at this.

    I think they had the right basic idea in establishing the “fiscal cliff” as an incentivizer for fiscal progress. They just didn’t choose the *correct* mechanism, which is obviously Snake’s 24-hour head-blasting implant.

  11. The CBO may be nonpartisan, but that doesn’t mean their conclusions aren’t biased.

    Personally, if laying off tons of government workers would induce a recession? Then I’m all for having a recession.

  12. The EconStories youtube rap videos talking about Keynes vs. Hayek have comment sections containing a vigorous debate about whether or not Keynesian economics really works.

    It seems like the Keynesians are thumping their chests in triumph over the current situation. But 2 things I’ve read over in the EconTalk website make me think that claim is overblown.

    First, there was a little known economist in the 1930’s by the name of Fischer who wanted to reconcile classical economics with what was going on during the depression. He believed that debt obligations held back a return to equilibrium and it could be argued that during a deflationary period those debt obligations need to be renegotiated. During the current fiscal crisis, banks did indeed restructure debt obligations. This seems to undercut the claim of Keynesian success.

    The second thing I read on EconTalk is how the Fed is buying 75% of the Treasury bonds to help finance the deficit. And the only reason why this hasn’t sparked inflation is that Frank-Dodd has so strangled the financial institutions that it has reduced the money supply in the private sector.

    I wish some economists would help explain this to the lay public. Then perhaps we wouldn’t end up with members of Congress calling for the deficit to be used to pay for the recovery from Sandy. It might also help raise questions as to whether we should continue to head down a Keynesian path.

    1. It might also help raise questions as to whether we should continue to head down a Keynesian path.

      What a poor, innocent child.

      1. According to Russ Roberts, parents are telling him that the EconStories rap videos are causing their kids to ask questions about government fiscal policy. I’m not ready to give up hope.

  13. Should be interesting to see hwo that all turns out. Wow.

  14. Here’s the problem.

    The “fiscal cliff” is the closest we have EVER COME to having a serious spending reduction plan actually executed as policy.

    If we start tinkering with it, because we havn’t got the guts to go through with it now, or we’re afraid it will have negative short-term economic consequences, then we run the risk of completely GUTTING it.

    We have all know, all along, that real debt reduction would be painful. And if we take apart this deal, something that was fought for bitterly and won, we’re not going to get a better one in a year or two.

    I would rather accept the pain of a second recession than surrender territory that was so painfully acquired in the summer of 2011, just because we’re afraid that it will be temporarily bad for the economy.

    If we’re serious about debt reduction we have to grow a backbone and accept that people aren’t going to be happy about in the short run, because people are going to be screaming a lot louder when it comes time for the next level of cuts. If we can’t do this now, what does that say about our commitment to reducing the size of government EVER?

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