Is Keynes Still Right?

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Random thought of the day:  what if Lord Keynes was right . . . but only in 1932?

A rather surprising amount of the stimulus discussion happening on the web seems to be taking place in some sort of frictionless universe where the only constraints are the intelligence of the pundits and the the amount of steely will that our policymakers can muster.  (As a friend dryly noted over IM this morning:  "In brightest day, in darkest night...beware my power..Green Lantern's light!".  Matthew Yglesias made a similar observation about foreign policy some years ago.)

But of course, policymakers aren't quite this free.  They are constrained by what bondholders are willing to lend them, and by what the populace is willing to let them borrow.  The deficit hawks who have suddenly gotten religion tend to hail from places where the population does not want the government to borrow and spend more money.  The kind of massive stimulus that Paul Krugman wants simply is not politically feasible, no matter how many Senators he lambastes.  Even if he convinced them intellectually, they'd be too afraid of their constituents to act on their beliefs.

Moreover, it occurs to me that one of these constraints is the welfare state.  Richer countries can afford to borrow more--but in the current environment, richer countries have already borrowed quite a lot.  That means that they have to repay any extra debt out of the remaining fraction of their income, which is shrinking.  Obviously, that makes extra debt service more burdensome--and also makes both bondholders and taxpayers more reluctant.

Furthermore, countries with big welfare states already have to borrow quite a lot of money just to fund the obligations they've already taken on, leaving less tolerance in the political and financial markets for additional debt.

I don't know that Keynes was ever right that government spending could jolt a country out of a liquidity trap.  But even if he was, that doesn't mean that he'd still be right--the political economy might have changed too much for his prescriptions to work.

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Megan McArdle is a columnist at Bloomberg View and a former senior editor at The Atlantic. Her new book is The Up Side of Down.

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