Big Government, Big Deficits & Big Debt

John Maynard Keynes was a British economist. He advocated interventionist government policy. He maintained that governments should use fiscal (eg, spending & taxation) and monetary (eg, the Feds control of the money supply & short-term interest rates) measures to mitigate the adverse effects of business cycles and economic recessions.


Keynes's influence waned in the 1970s, partly as a result of problems (eg, stagflation) that began to afflict the western economies. And partly due to critiques from Milton Friedman and other economists who were pessimistic about the ability of governments to regulate the business cycle with fiscal policy.


However, the advent of the recent financial crisis has caused a resurgence in Keynesian thought. Keynesian economics has provided the theoretical underpinning for the plans of President Barack Obama,

Keynes believed that Big Government spending was necessary to help alleviate the economic growth and unemployment problems that arise during a recession. This naturally leads to government deficit spending.

However, Keynes would also maintain that in better economic times surpluses should arise from tax collections that exceed current government spending--and this should in turn reduce or eliminate the current federal deficit.

It's a great theory--but it rarely plays out in practice. The closest we get in modern times is surplus created for a short time during the Clinton administration. This came about when spending growth was held down in relation to tax collections.


The Wall Street Journal recently helped put things in perspective. Europe has resisted the US's massive stimulus spending. Here is the WSJ opinion piece.

We witnessed that rarest of things last week—a politician's public humility. When France, along with Germany, reported an unexpected uptick in economic growth for the second quarter, French Finance Minister Christine Lagarde called the return to growth "very surprising." Imagine that—a major global economy stops shrinking, without the benefit of trillion-dollar stimulus packages or major reforms, and a politician doesn't rush to claim credit for the achievement.

…it's refreshing to hear the minister responsible for France's economy speak the truth about growth. It is the product of literally millions of decisions made by millions of people about what to produce, buy and sell. Politicians can influence all that decision making, especially by increasing or decreasing the incentives to produce, work and innovate. But they can't control today's multi-trillion-dollar economies, no matter how much they'd like to take credit for doing so…