Wonky, subterranean revolutions that transform eras
John Maynard Keynes wrote wonky books that were read by few aside from academic economists. In those books he proposed something that doesn’t sound all so dramatic but would eventually have a major impact: deficit spending.
Working within the context of ideas saying budgets should be balanced, the government didn’t run large deficits or wrack up much debt prior to the Great Depression. For example, in 1929 the debt was just $17 billion (16% of GDP).
Keynes said governments should run large deficits during periods of economic contraction to bolster effective demand. Balancing could be thought of as a long-term cyclical endeavor. Surpluses could be run during periods of expansion — so balance could be achieved after a long-term business cycle.
That seemed logical, but critics said politics would override fiscal responsibility. If you give the government an excuse to spend more than it takes in, it will abuse the privilege. On the basis of a supposed Keynesian theoretical justification, governments would live beyond their means to a point of crisis.
Sure enough, in the Keynesian era the debt rose to $326 billion (38% of GDP) in 1967 and then $4,065 billion (62% of GDP) in 1992 and then $24,057 billion (110% of GDP) this year.
Sounds like a brewing crisis, but another theoretical revolution is being touted as an elixir. Modern Monetary Theory says the amount (and percentage) of debt doesn’t matter (after all). The government can print money and therefore always pay the debt. As long as there’s no inflation and no collapse of the (debased) currency, it’s OK to print and spend.
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Given the theoretical justification to run deficits, well, they couldn’t resist.
Given the theoretical justification to print and spend, well . . . what do you think they’re going to do?