What Would Keynes Think of Trump's Infrastructure Plan?

If President Donald Trump sticks to his campaign promises, politicians will soon be debating the merits of a $1 trillion infrastructure program. Before the election, he trumpeted an initiative that would create “jobs, jobs, jobs” in part by rebuilding the U.S.’s bridges and highways. After the failure of his efforts to repeal and replace the Affordable Care Act, he will likely be moving on to infrastructure soon. In fact, this week the president suggested that perhaps he will accelerate the introduction of infrastructure-related legislation since it has the potential to attract votes from Democratic members of Congress. Herein may lie Trump’s chance for a grand compromise and some real deal-making.

And if the government is going to have a debate about infrastructure, then the public will almost certainly be hearing a lot more about John Maynard Keynes. After all, Keynes is widely considered the father of the idea that large government deficits can stimulate the economy and create jobs, and a $1 trillion infrastructure program will inevitably generate a debate about deficits. Further, Keynes is well known for having recommended large-scale public works projects as a means of combatting unemployment. He was the co-author in 1929 of the manifesto Can Lloyd George Do it?, which supported a £250 million public-works program mooted by the U.K.’s Liberal Party, and he wrote an open letter to Franklin D. Roosevelt in 1933 supporting an expansive public-works program financed by government borrowing.

The last time Keynes’s legacy was invoked to make sense of the American economy was immediately after the collapse of Lehman Brothers triggered the Great Recession in 2008. Headlines around the world featured his name: “The Revenge of Keynes,” (Le Monde) “The undeniable shift to Keynes,” (Financial Times), “What Would Keynes Have Done?” (The New York Times). After decades of neglect by the economic mainstream and the financial press, it was Keynes’s moment: The Great Moderation—the two decades before the financial crisis when economists and policy makers were lulled into believing that they had mastered how to fine-tune the economy and prevent the possibility of a crisis—had fallen apart and experts were grabbing for a policy that could save capitalism.

The questions now are somewhat different, however, than they were during the financial crisis. Capitalism does not appear to be near collapse and the Federal Reserve is starting to wind down many years of monetary stimulus as it sees its goals of lower unemployment and steadier economic growth borne out. So, given that the question will likely soon arise and many will profess to have an answer: Would Keynes approve of Trump’s infrastructure plan?

If Trump’s intention is to stimulate the economy with a large dose of deficit spending, then the answer would actually be no. This is perhaps the most misunderstood part of Keynes’s legacy, but the simple fact is that he did not, contrary to popular understanding, support deficit spending. Few deny Keynes’s brilliance, but rather than trying to learn from his nuanced analysis of the economy, many attempt to appropriate his brilliance for their own purposes: For those who want easy answers to difficult policy questions, he readily becomes a monochromatic advocate of their own best ideas (or, alternatively, a statist fool who was too clever by half).

Like any good theorist, his views evolved as he encountered new information and thought more deeply. In 1945, while he was working with the British Treasury on postwar planning, he wrote, “It is important to emphasize that it is no part of the purpose of the Exchequer or the Public Capital Budget to facilitate deficit financing.” This was not a late-in-life conversion (Keynes would die a year later), but rather sprang from a belief that he had held for at least two decades. Thus, while Keynes in 1929 or 1933 might have thought that the one-off economic boost from a large-scale infrastructure program was just the thing to help an economy like America’s in 2017, his writings just a few years later, in 1937 and during World War II, suggest that even with relatively high unemployment, he saw a much reduced role for ambitious public-works projects.

The belief that drove his opposition to deficits in the ordinary budget (what he referred to as the “Exchequer” budget) was his adherence to the idea that governments should manage their budgets in the same way that businesses do: by breaking their capital expenditure and borrowing off into a separate capital budget. He advocated government borrowing only if the money was spent on capital assets that could generate the revenues to repay the loans—borrowing would never appear in the Exchequer budget. He did not believe that running a deficit in that budget was economically sound and he said so repeatedly.

It is possible to use the mathematical models that Keynes built to show how a deficit-increasing measure put toward “consumption” rather than investment (i.e. to buy pencils or distribute food stamps) could stimulate the economy in theory, but he never advocated doing this. In his mind, the government should not borrow money for current expenditures—only for long-term capital expenditures.

Keynes’s insistence that the government should run a capital account in the same way that a corporation does would seem to put a damper on the question of whether Keynes would have Trump’s infrastructure program: The U.S. government does not have a capital budget and there is no reasonable chance that there will be one anytime soon. Nor is it reasonable to believe that the Republican majority in Congress would ever raise taxes by $1 trillion to pay for new roads and bridges. However, given that Keynes believed that borrowing should only be undertaken to finance capital projects, then it’d still be right to say that he would not in principle object to such borrowing. The more difficult question, then, is to determine whether Keynes would think such spending is wise given where the American economy is at the moment.

In answering this, it is again useful to note another way in which Keynes’s beliefs have been distorted by the passing of time. Despite decades of misrepresentation by right-wing advocates of free markets, Keynes was in fact not a wild-eyed advocate of large-scale government spending. In 1937, for instance, when the British economy was beginning to show signs of growth, but unemployment still hung around 10 or 11 percent, he wrote, “Public loan expenditure is not, of course the only way, and not necessarily the best way, to increase employment.”

But if this seems an unexpected sentiment from a man who had encouraged public-works projects in 1929 and 1933, it makes more sense in light of what Keynes wrote in The General Theory of Employment, Interest, and Money, published in 1936. His argument in The General Theory was that the flow of infrastructure work, or public investment, should be planned over a long time horizon, and used as a gracefully operated counterweight to swings in private investment. He was not so much concerned with precisely correcting for the swings in private investment as he was to create the expectation that the government would smooth out the most pronounced dips in private investment and thus cause it to be less volatile. Only in late 1933 had Keynes begun to fully appreciate the effect of expectations on the economy and his hope by 1936 was that a “board of public investment” could keep a well-publicized list of necessary capital projects and advocate for their regular execution to build confidence among business executives in the stabilizing prospect of public-works projects.

Of course, Keynes was famous for changing his mind, so it will always be impossible to know what Keynes would recommend today. But the evidence suggests that he would not have been an advocate of a $1 trillion infrastructure project when the economy is already growing steadily, if moderately, and employment is below 5 percent. Leaving aside his very clear writings over several decades about the proper role of deficits, it’s awfully hard to find support in his work over the last decade of his life that would hint that he’d be a willing ally to the president’s infrastructure plans.

In the end, however, the question of whether Keynes would support Trump’s infrastructure is, in and of itself, not the most important one. At a time when the U.S.’s roads and bridges are crumbling, it is worth asking whether the country should depend on occasional one-off splurges on infrastructure, or whether there are benefits to planning a regular program of capital projects. Likewise, Keynes’s edict that the government should only go into debt to pay for capital spending raises questions that should move people past comfortable, familiar answers that arise from narrowly drawn ideological positions. Determining what Keynes might think about Trump’s plan should be much less compelling than the larger lessons to be gleaned from examining what Keynes came to think about infrastructure spending over the course of a lifetime spent pondering the question of how to help the economy work best.