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.