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As the years went by, the results were increasingly disastrous. By the 1970s, western countries were experiencing high unemployment and high inflation – supposedly impossible under simple Keynesian models – along with spiralling deficits and slowing growth.

In practice, governments were rarely able to identify and implement fiscal policy in the manner dictated by Keynesian theory. At best, the lag times between fiscal stimulus and economic cycles were just too great. At worst, stimulus spending was driven by political considerations. As a result, stimulus was deemed necessary when the economy slowed, while cutting stimulus seemed unnecessary when things were better. Over time, the excesses of government intervention resulted in structural deficits and ballooning debts.

A younger generation of economists began to question the logic of the Keynesian model. Isn’t deficit-financed government spending just borrowing money that would otherwise be spent by consumers or invested by businesses? Isn’t this just redistributing economic activity, while adding to the national debt burdens? As economist Russell Roberts quipped, fiscal stimulus is like taking a bucket of water from the deep end of a pool and dumping it into the shallow end, with the naïve hope that the water level will rise.

Canada had its own chapter in the story of failed Keynesian fiscal policy. Under Pierre Trudeau’s governments of the 1970s and 1980s, the country experienced growing deficits, slowing growth, rising unemployment and rising inflation. A decade of cautious austerity under Brian Mulroney did little beyond moderate the bleeding. Finally, with the looming risk of a debt crisis, Jean Chrétien and Paul Martin undertook a painful combination of tax hikes, vital service reductions, and provincial transfer cuts to cure Canada’s debt ailment. Not surprisingly, a consensus developed to leave demand stimulation to monetary policy and budgets close to balance.