Was Keynes A Closet Supply Sider?

Shikha Dalmia Reason Hit & Run April 17, 2012

Shikha Dalmia | April 17, 2012

Nick Gillespie pointed out last fall that Keynes wasn't really Keynesian, at least not in the sense that contemporary tax-and-spenders take him to be. He (meaning Keynes not Gillespie) would have been horrified by the notion that one can stimulate the economy the kind of obscene deficit spending that this administration has engaged in. As Gillespie explained:

Keynes was against the very sort of large structural deficits that characterize contemporary federal budgets and policy, believing instead that deficits should be "temporary and self-liquidating." And Keynes believed that any sort of counter-cyclical spending by government should be directed toward increasing private investment, not simply spending current and future tax dollars on public works projects.

Or, to put it another way: If the federal government had a strong track record of responsible spending, it would mean one thing if it went into hock for a short period of time to goose the economy (again, whether this would work is open to question). It means something totally different when a government that spent all of the 21st century piling on debt and new, long-term entitlement programs responds to an economic downturn first by creating yet another gargantuan entitlement (Obamacare) and taking on even more debt in the here-and-now.

But if Keynes wasn't a Keynesian, what was he? As it turns out -- fasten your seat belts and take a deep breath "“ he was a supply sider. Yes. It's true. He believed that, up to a point, cutting taxes would actually increase government revenues and vice versa. Here is a quote of Keynes that I stumbled upon in a 2004 Heritage Foundation paper by Arthur Laffer, the modern-day guru of supply side economics:

When, on the contrary, I show, a little elaborately, as in the ensuing chapter, that to create wealth will increase the national income and that a large proportion of any increase in the national income will accrue to an Exchequer, amongst whose largest outgoings is the payment of incomes to those who are unemployed and whose receipts are a proportion of the incomes of those who are occupied...

Nor should the argument seem strange that taxation may be so high as to defeat its object, and that, given sufficient time to gather the fruits, a reduction of taxation will run a better chance than an increase of balancing the budget. For to take the opposite view today is to resemble a manufacturer who, running at a loss, decides to raise his price, and when his declining sales increase the loss, wrapping himself in the rectitude of plain arithmetic, decides that prudence requires him to raise the price still more--and who, when at last his account is balanced with nought on both sides, is still found righteously declaring that it would have been the act of a gambler to reduce the price when you were already making a loss.

Pretty funny. Lord Keynes had some snark in him! As Randy Jackson would say: "Nice, dude, that was very nice."

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It is pretty irresponsible to talk about Keynes without including a link to Hazzlitt's the fisking of Keynes' General Theory.

The Failure of the New Economics

This is payback for Barney's "Even Hayek" comment, isn't it?

No economist, not even Keynsians deny that there's a point where increasing tax rate increases revenue. However, the vast majority of economists (on the right and the left) believe that that level is higher than the current level of tax rates. There are other, good reasons to lower tax rates, but the claim that we're on the side of the Laffer Curve where tax cuts will lead to increased revenues is not it.

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Was Keynes A Closet Supply Sider?

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