Long-term effects of policies matter

Published 7:41 pm Wednesday, February 4, 2015

The weakest part of Keynesian economics — what President Barack Obama has now rebranded as “middle class economics” — is the long run. Economist John Maynard Keynes himself acknowledged this.

“But this ‘long run’ is a misleading guide to current affairs,” Keynes wrote in his 1923 work, “A Tract on Monetary Reform.” “In the long run we are all dead.”

Basically, the flaw is this. Keynesians recommend fighting recession and unemployment with massive doses of public spending — on infrastructure projects, or job training programs, or unemployment assistance. Such spending has to be deficit spending, because government revenues drop during a recession. But that’s OK, the theory goes. Public debt isn’t a short-term problem, it’s a long-term problem. It can be dealt with later.

And that’s exactly the theory that the indefatigable Paul Krugman defends in the New York Times this week.

“On Monday, President Obama will call for a significant increase in spending, reversing the harsh cuts of the past few years,” Krugman writes. “He won’t get all he’s asking for, but it’s a move in the right direction. And it also marks a welcome shift in the discourse. Maybe Washington is starting to get over its narrow-minded, irresponsible obsession with long-run problems and will finally take on the hard issue of short-run gratification instead.”

In his opinion, the reason the recession has stubbornly refused to die is that there has been too much fiscal responsibility — what Krugman calls “austerity.”

That might be a valid argument, if federal spending actually decreased. It hasn’t. If the deficit is down, it’s merely because spending hasn’t increased as fast as tax revenues have.

The truth is that the long run matters. It matters for federal programs that are going broke — entitlement programs like Social Security and Medicare — and it matters for the stability of the dollar. The Federal Reserve may be propping up the economy with “quantitative easing” but all that extra money flowing into the economy chips away at the value of our currency. Inflation is always just around the corner, and doesn’t need this kind of encouragement.

But the bottom line for Krugman and his disciples in the Obama administration is this — the fat new federal budget is, they believe, the best way to get the economy really rolling again.

But here we’re back to the long run, as Damon Linker writes for The Week.

“If deficit spending is required when we’re deep in a painful recession, and it’s also required when the economy is growing and creating jobs, when is deficit spending not required?” Linker asks. “When can it stop? What are the specific economic targets we need to meet before we can begin to readjust our budgeting, making it more sustainable in the long term?”

President Obama’s budget is DOA in Congress, of course. It won’t even be the starting point for discussions.

Short term fixes are important. We’d mostly like to hear about what government could stop doing, in order to strengthen the economy. Lawmakers, however, have a duty to keep an eye on the long run.