Alan Blinder has a thought-provoking article on Greece in the Wall Street Journal (with more Greek metaphors than Jason had Argonauts). His central claim is that governments should take their cues from St. Augustine, who asked God to make him chaste, but not yet. Because of the recession, the argument goes, we ought to run deficits as the “oracle” Keynes counseled.
But once things turn around, we should concentrate on balancing the books. The general strategy is: Run deficits in times of famine and surpluses in times of feast. This type of argument is quite popular now and was repeated ad infinitum at a gathering of left-of-center thinkers I attended last summer. It has also become a common argument for those who advocate tax increases rather than spending cuts to deal with state budget crunches.
Even if we conceded the Keynesian point that deficit spending is what the doctor ordered, and there are many who are not prepared to do so, what shall we make of the Keynesians’ view of politics? From my perspective, politicians simply don’t behave as the Keynesian model predicts. In the 74 years since Keynes wrote his General Theory, the U.S. has been in a recession just 17 percent of the time. Still, during those years, the Federal Government ran deficits 84 percent of the time. As Buchanan and Wagner argued several decades ago in Democracy in Deficit:
Keynesian economics has turned the politicians loose; it has destroyed the effective constraint on politicians’ ordinary appetites. Armed with the Keynesian message, politicians can spend and spend without the apparent necessity to tax.
Thankfully, at the state level, the politicians are not turned fully loose. This is because every state but Vermont has a balanced budget requirement. If, however, the new norm is for states to turn to the Federal Government for bailouts during a downturn, these balanced budget requirements will become increasinly meaningless. It is my guess that, like their federal counterparts, state politicians will fail to behave as the Keynesian model predicts.