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Wednesday, October 22, 2008

Are we still Keynesians?

Watching everybody flip out over today's announcement that Ontario will run a substantial deficit this year, I couldn't help but be reminded of this article, passed on to me during the election, on the NDP and their strict opposition to deficit spending. One quotation stood out:

It's been more than a decade since Canada's party of the left could realistically be described as social democratic. What is striking about this current campaign is the realization that, in 2008, they are not even Keynesians.

And really, it's true. You can argue (as one commenter does on the NDP article) that the left has long been against deficit spending, but since I see both the right- and left-wing political parties as Keynesian*, I think that the observation has merit.

Like all things, though, Keynesianism has it easier in good times than in bad. While plenty of folks seem to agree that government's fiscal policy and central bank's monetary policy were necessary to keep the good times good through the years, many of them are willing to drop their defense of Keynes' theory faster than most people misplace their belief in free speech at a KKK rally now that times are getting tough.

If you accept the theory that government spending and monetary policy can be used to smooth out the business cycle, you ought to understand that either raising taxes or cutting spending to avoid deficit will both have cause a short-run slowdown in the economy, especially spending cuts - with the level of government involvement we have in the economy today, they're sure to have an effect. This would actually make the current economic slowdown worse - not exactly what Keynesians are all about, is it?

That's why many economists and the Premiers are coming out in favour of allowing deficits rather than taking drastic steps to avoid them - they're simply sticking with the Keynesian approach.

Now, this isn't to say that I approve of deficit spending. I don't. I think we ought to pay down our debt and spend within our means.

That said, I also don't think it's the role of the government to tweak the economy - I think that people have been successful since the Great Depression in spite rather than because of government's meddling in business cycles.

But I still find it interesting that there is a hole in this belief in Keynesianism, (At least here in Canada. In the US, they're still learning the hard way where runaway spending will get you.) and wonder if it's a signal that we will see macroeconomists looking for new theories.


*Note that the differences between Keynesianism and neo-Keynesianism are really moot for the purposes of this discussion. When I say "Keynesian" here, I am merely referring to a belief that the government/central bank needs to be involved in "smoothing out" business cycles to improve the market/economy. When Nixon said "We are all Keynesians now," he was referring to a general acceptance of the above, and not to anything involving more advanced understanding of the theory and I mean it in the same way. As such, I didn't bother with the "neo," though it's technically more correct these days.

Posted by Janet Neilson on October 22, 2008 in Economic freedom | Permalink


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Watching everybody flip out over today's announcement that Ontario will run a substantial deficit this year,
Posted by Janet Neilson on October 22, 2008

They must have short memories because they ran a deficit last year, and the year before that, and the year before that, and the year before that..................

Ontario owes about $150 billion in total, what's $500 million more. It only fiat currency it's not like it's actually worth anything.

Posted by: The Stig | 2008-10-22 4:13:28 PM

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