A major problem with Keynesian economics is political - in fact, politicians

Steve Horowitz has a good piece detailing one of the basic problems with Keynesian economics. In a formal sense we can say that this is the addition of public choice economics which makes it not work in the real world. For the incentives faced by politicians are that they're only likely to do half of the idea, not all of it.

Keynesian economics changed all this by constructing an intellectual justification for viewing the federal budget as a tool for managing the economy rather than a constraint under which politicians operate.  Keynesianism argued that in recessions budget deficits could stimulate aggregate demand and lead to recovery, while in good times surpluses would both prevent excessive growth and pay back the debt.

This idea, known as “functional finance,” looks good on the blackboard but has a fatal flaw.


We must ask: Under the incentives built into our political institutions, is functional finance in the politicians’ self-interest?

Buchanan and Wagner say no.  Politicians love deficits because spending on their constituents gets them votes but raising taxes costs them votes.  Politicians are always vote-seekers, so those incentives and disincentives hold whether the economy is in a recession or a period of high growth.  Surpluses in growth periods are incompatible with those incentives.

That fixing the roof while the sun is shining that Keynes talked of never really does seem to happen.

Our own favourite example of this comes from Polly Toynbee. Certainly, that's not where we're going to go look for economic advice but as a measure of the political wind she's pretty good. It's instructive to read her pieces from the 2005 to 2007 period at the Guardian's archive. She notes the flood of money coming in from the taxation of a booming economy And uses that flood as the justification for setting up vast new redistributive programmes to beat child poverty (really, inequality) and so on.

Without noting that a budget surplus at the peak of this country's longest and largest peace time boom in modern history really might be a very idea indeed. A time to be paying down that national debt, not increasing it as G. Brown continued to do.

As Horowitz says, whatever else we might think about Keynesian economics the exigencies of politics mean that we don't actually follow those rules anyway - thus, sadly, it doesn't work over the long term.