Daniel Kuehn is obviously peeved at Chris Edwards, who thinks that Keynesian fiscal policy is contradictory. I think Daniel is within reason, but ultimately it seems as if libertarians and liberal-Keynesians talk over each other.

Edwards’ argument is as follows: Keynesians claim to favor short-term deficits to boost aggregate demand, but long-term deficit reduction (to avoid “crowding out” and sound public finances). However, he does not seem how these two ideas can possibly be mutually compatible. Why? Because, every time there is a recession Keynesians argue for more fiscal stimulus. When budgets do begin to be balanced, Keynesians promote increasing deficits again to avoid a recession. According to Edwards, Keynesian long-term fiscal policy just is not credible.

The argument does not strike me as strong. Any inability for the U.S. Government to balance its government does not find its origin in the frequency of recessions, but in continued deficit spending or growth in expenditure beyond growth in revenue intake. What this suggests is that governments have not been following the Keynesian policy prescription. Here is the data,

The only surplus years came during the Clinton administration (which I understood to be a trick of movement of government funds, but I cannot find any credible sources which confirm this — so, for now, I assume that my prior conviction was wrong). Otherwise, there have been reductions in deficit sizes, but these are deficits nonetheless and they have added to total government debt. Also, interestingly, apart from the most recent recession, marginal deficits have not been significantly greater during recessions than during normal economic periods — either because, in Keynesian terms, these were not demand-driven recessions or because they were “solved” by monetary policy. This alone undermines Edwards’ case, since: in the past ~30 years, only the most recent recession has led to a dramatic increase in the size of deficits (which is “normal” given the collapse in revenue intake and the large stimuli implemented in response to a recession which, from the onset, looked more severe than any of its recent predecessors), suggesting that debt growth has been mostly the product of other (not counter-cyclical “Keynesian”) spending policies.

What really strikes me the most about Edwards’ short piece is that his sole argument revolves around the alleged frequency of counter-cyclical fiscal policy. Seriously, when was the last time (prior to 2007) that he remembers such a large fiscal stimulus in response to an industrial downturn? More critically, how does he conclude, seemingly a priori, that counter-cyclical fiscal policy is always greater than whatever reduction in debt the U.S. Government can muster in between recessions? There are better arguments out there and they revolve around the long-term nature of some of the spending programs many Keynesians promote, including and especially long-term entitlement programs. (Or, even, the economic argument that counter-cyclical fiscal policy cannot lead to a sustainable recovery — surely, Keynesians will disagree with it, but they will all agree that it is a much better argument than the one Edwards actually made!)

As can be inferred by my earlier use of the term “liberal-Keynesian,” I intended to argue that the confusion between many Keynesian v. “Austerian” arguments is in the perception of the nature of the many long-term spending programs liberals — many of which whom are Keynesian — tend to favor. First, though, I wanted to look at where exactly the largest marginal expenditures have been. Taking data from here, between 1995–2012 (a limited range, which might actually be biased against liberals, given the Reagan and Bush I years), I managed to come up with this chart (which is woefully rudimentary and actually took me much longer than it should have) — I apologize for the 3D, but it was the quickest way I could make all the lines more visible relative to each other,

Here is the same graph, but two-dimensional,

The big three are: “pensions” (social security + ?), healthcare, and defense. The latter is not liberal. “Welfare” seems to have gone up most dramatically during the recent recession, and may reflect an increase in unemployment benefits and other welfare programs meant to relieve poverty during trying times. “All other,” which I have not taken the time to dissect (although, it includes discretionary spending, including fiscal stimulus), seems almost counter-cyclical: note, prior to 2006 (October 2005 to September 2006), “all other” is relatively stable. This leaves two possible targets: pension and healthcare spending. While libertarians and the right can definitely disagree with their analysis and conclusions, many liberal-Keynesians have argued in favor of reducing the latter by reforming the healthcare system into a universal one. I do not think any of this means that some political ideas of liberal-Keynesians are not contradictory with Keynesian spending policy, but it does mean that the case is not as clear as non-liberals may like it to be.

Now, I turn to Daniel. In defense of his criticism of Edwards, Daniel quotes several prominent Keynesians in a series of posts (Krugman, DeLong, Romer, and others). Something I note that most of these quoted economists have in common is that they do not support the Bush tax cuts. While there may certainly be a case that the Bush tax cuts were ineffective because of how they targeted different income levels and how this may have distorted their effect, this is not what these economists seem to be arguing. Rather, they seem to be claiming that in the face high (even rising) long-term costs of the entitlement programs and defense spending, we should increase taxes. This, to me, seems like a bad (possibly mildly contradictory) argument. Long-term debt ought to be reduced by annual budget surpluses or by increase in real tax revenue from an increase in real income, not by an increase in the tax burden. (There are, of course, arguments that can be made with regards to whether the public should provide these entitlements at all and whether some of this spending leads to higher revenue intake [such as investment in education] in the long-run, but these are all tangential to the point at hand.)

These were not the arguments Chris Edwards made. His argument was a bad one, and I am surprised that — as Daniel points out — David Henderson and Don Boudraeux endorsed it.