Bruce Bartlett has a post at the New York Times’ “Economix” blog titled “Keynes’ Biggest Mistake” (link). In it Bartlett asks, “Does Keynesian economics completely ignore the long run?” His answer: No, but the title of Keynes’ famous book — “A General Theory of Employment, Interest, and Money” — made it seem as though he did.
But in all, Bartlett presents a strong case for the use of Keynesian fiscal stimulus when the current circumstances call for it.
[T]he core insight of Keynesian economics is that there are very special economic circumstances in which the general rules of economics don’t apply and are, in fact, counterproductive.
This happens when interest rates and inflation are so low that there is no essential difference between money and bonds; money, after all, is simply a bond that pays no interest. When this happens, monetary policy becomes impotent; an increase in the money supply has no stimulative effect because it does not lead to additional spending by consumers or businesses.
Keynes called this situation a “liquidity trap.” Under such circumstances, government spending can be highly stimulative because it causes money that is sitting idle in bank reserves or savings accounts to circulate and become mobilized through consumption or investment. Thus monetary policy becomes effective once again.
I am linking to Bartlett because I agree with his take when applied to the US case. Last night I wrote about current US macroeconomic policy amounting to “fiscal contraction amid monetary expansion” (link). One point I addressed is that advocates of fiscal stimulus are right, but not for being theoretically right. They are empirically right. In the current context of high unemployment and zero-interest-rate policy — what Bartlett following Keynes called a “liquidity trap” — advocacy of fiscal expansion becomes demonstrably reasonable. If you accept that the current employment-to-population ratio is a problem — which I accept and I think we all should accept — and understand that interest rates have already been dropped, publicly commissioned fiscal stimulus becomes all that is left. But again, not because fiscal stimulus and government expansion is always good. Rather, the case for stimulus is made by current circumstances. Fiscal expansion makes sense once you account for (a) an already tapped monetary apparatus, (b) the existence of still-weakened private markets, and (c) the plight of over-extended households with stagnant median incomes and reduced access to credit.
Now is precisely the time to use the US’s unmatched fiscal privileges to reinvest in consumers and try to spur greater money velocity. Not always, but now.