The “Bad Penny” of Keynesian Fiscal Policy

I was interviewed yesterday about the possibility of a recession and potential policy options. You can watch the full interview here and get my two cents about economic forecasting, as well as Keynesian monetary policy.

In this segment, you can see that I’m also worried about a return of Keynesian fiscal policy.

Let’s examine the issue, starting with an analogy.

According to the Urban Dictionary, a bad penny is a “thing which is unpleasant, disreputable, or otherwise unwanted, especially one which repeatedly appears at a bad time.”

That’s a good description of Keynesian economics, which is the strange notion that the government can provide “stimulus” by borrowing money from some people, giving it to other people, and assuming that society is then more prosperous.

Keynesianism has a long track record…of failure.

• It didn’t work for Hoover.
• It didn’t work for FDR.
• It didn’t work for Japan.
• It didn’t work for Obama.

Now the bad penny is showing up again.

Donald Trump already has been pushing Keynesian monetary policy, and the Washington Post reports that he is now contemplating Keynesian fiscal policy.

Several senior White House officials have begun discussing whether to push for a temporary payroll tax cut as a way to arrest an economic slowdown… The payroll tax was last cut in 2011 and 2012, to 4.2 percent, during the Obama administration as a way to encourage more consumer spending during the most recent economic downturn. …Payroll tax cuts have remained popular with Democrats largely because they are seen as targeting working Americans and the money is often immediately spent by consumers and not saved. …In the past, Democrats have strongly supported payroll tax cuts, while Republicans have been more resistant. Republicans have complained that such cuts do not help the economy.

As I wrote back in 2011, it’s possible that a temporary reduction in the payroll tax rate could have some positive impact. After all, the marginal tax rate on work would be lower.

But it wouldn’t be a large effect, and whatever benefit wouldn’t accrue for Keynesian reasons. Consumer spending is a symptom of a strong economy, not the cause of a strong economy.

Now let’s look at another nation.

Germany was actually semi-sensible during the last recession, resisting the siren song of Keynesianism.

But now politicians in Berlin are contemplating a so-called stimulus.

The Wall Street Journal opines against this type of fiscal backsliding.

The German Finance Minister said Sunday he might possibly…cobble together a Keynesian stimulus package for his recession-menaced country. …Berlin invites this stimulus pressure as the only large eurozone government responsible enough to live within its means. A balanced budget and government debt below 60% of GDP encourage the International Monetary Fund…to call for Berlin to “use” its fiscal headroom to avert a recession. …Germany’s record on delivering projects quickly is lousy, as with Berlin’s perennially delayed new airport. Too few projects would arrive in time to stimulate the new business investment proponents say would save Germany from an imminent downturn, if they stimulate business investment at all. …The worst idea, though one of the more likely, is some form of cash-for-clunkers tax handout to support the auto industry.

The right answer, as I said in the above interview, is to adopt sensible pro-market reforms.

The main goal is faster long-run growth, but such policies also help in the short run.

And the WSJ identifies some of those reforms for Germany.

Cutting taxes in Germany’s overtaxed economy would be a faster and more effective stimulus… The main stimulus Germany needs is deregulatory. In the World Bank’s latest Doing Business survey, Germany ranked behind France on time and cost of starting a business, gaining construction permits and trading across borders. Germany also lags on investor protections and ease of filing tax returns. A dishonorable mention goes to Mrs. Merkel’s Energiewende (energy transformation), which is driving up costs for businesses already struggling with trade war, taxes and regulation. …these problems don’t require €50 billion to fix, and scrapping the Energiewende would save Berlin and beleaguered businesses and households money. The bad news for everyone is that Berlin is more likely to fall for a quick-fix chimera and waste the €50 billion.

The bottom line is that Keynesian economics won’t work. Not in the United States, and not in Germany.

But politicians can’t resist this failed approach because they can pretend that their vice – buying votes by spending other people’s money – is actually a virtue.

In other words, “public choice” in action.

Let’s close by augmenting our collection of Keynesian humor. Here’s a “your mama” cartoon, based on the Keynesian notion that you can boost an economy by destroying wealth.

P.S. Here’s the famous video showing the Keynes v. Hayek rap contest, followed by the equally enjoyable sequel, which features a boxing match between Keynes and Hayek. And even though it’s not the right time of year, here’s the satirical commercial for Keynesian Christmas carols.