Everyone’s a Keynesian in bad times
Governments the world over have already implemented massive fiscal and monetary stimulus during this Covid-19 pandemic. This is a fact. And we are still hearing calls for more, from politicians, business people and the man in the street. Many are probably justified, based on anecdotal evidence of people in dire need of a helping hand. It would seem everyone is now a self-proclaimed Keynesian, in touting for more handouts, more aid, more stimulus.
For those who are unaware, John Maynard Keynes (1883-1946) was a famous British economist. Keynes is widely associated with aggressive government intervention to pump-prime the economy — increase government spending (G) to cover for shortfalls from private consumption (C) and investments (I) during recession since aggregate demand is composed of C, I, G and net exports (X-M). Doing so can quickly stabilise the economy and prevent high, prolonged unemployment. His ideas were published in 1936 and widely embraced in the ensuing years in which increased government spending was credited with jumpstarting production and leading economies out of the Great Depression and into the post-World War II years of prosperity.
What is often (wilfully) forgotten is that Keynes, in fact, advocated countercyclical fiscal policies for the times when market forces fail to do the job. In other words, governments should act to counter normal business cycles — spending more during recessions but also reining in excesses during boom times. But of course, taking away the punch bowl in the middle of the party is never popular. This is the reason why everyone is a Keynesian during bad times but not so during good times.
A case in point: Almost every US president has run a budget deficit in the past five decades of booms and busts. Republicans are popular for big tax cuts while Democrats favour big spending on social programmes. Only under the years of former President Bill Clinton did the US achieve a surplus. Since then, the deficit has only grown larger, to successive historical highs. We see a similar trend in the UK — where there was a budget surplus in only six of the past 50 years (see charts). As we said, popularity wins elections under the democratic system of governance and elections are held every four to five years. Hence, there is no incentive for politicians to plan long term. A huge deficit becomes someone else’s problem, especially when the ruling government regularly changes between two dominant parties.
Of course, there are exceptions, though they are few and far between. For example, traditionally fiscal disciplined countries such as Germany and Singapore have adhered more closely to the Keynesian economics of countercyclical fiscal policies. Perhaps these governments have greater political capital to make the hard decisions, from the trust built on years of past policy successes and historical experience.