Why You’re Probably a Pragmatic Keynesian

In a recent post I said that my political views are independent. But if I was forced to describe them more specifically I’d probably say they’re consistent with Pragmatic Keynesianism. Yes, I know that’s a totally made-up thing, but it just describes someone who’s socially liberal and fiscally conservative within the boundaries of understanding the reality of the economy. But what the heck does that mean?

In a recent interview Libertarian Gary Johnson said most Americans are Libertarians and just don’t know it. But Johnson’s very conservative economic view of the world isn’t exactly right in my opinion which leaves him a little off base. That’s where the Keynesian piece comes in to build a more realistic view. Before you give up, there’s some serious myth busting below so hang in there – I think/hope most of you will agree with my conclusion.

I like the Libertarian platform on most social issues. Basically, the government should butt out of our personal issues. The government shouldn’t tell me what I can consume, whom I can marry, what I can do to my body, what public establishments I can enter, etc. In this sense, I am basically your average stereotypical Californian.

But I part ways with the Libertarian party on many economic issues. And this is where Keynesianism is very useful. No, not the mythical “Keynesianism” you read about on scary websites who constantly misconstrue it to mean “socialism”.¹ Real Keynesians are capitalists. They are pro-market. They are aggressively pro-investment and in favor of productive output. They are not in favor of ever larger government or government rule of the economy.  They despise Communism and Socialism. But they also recognize the need for some government.  In essence, real Keynesians recognize that some degree of government is not only a moral good, but also an economic good because it can help stabilize the economy in ways that unfettered capitalism won’t.

If you’re in favor of some government then this introduces a simple reality for the economy – the size of the government will automatically expand during every single contraction or necessary increase in government intervention (such as wars). So, for instance, let’s say you recognize that the US military is a public good and a necessary good.  This is the basic foundation for the starting size of our government.

In 2015 defense spending totalled $600B.  Let’s assume we’re being super fiscally responsible in 2015 and we run no deficit so we fully fund our spending with $600B in taxes. But then in 2016 the economy gets hit by a recession and tax receipts fall by 17%. All of a sudden we have a $100B deficit so we have to finance the same $600B spending with $100B in bonds. Keep in mind we didn’t choose to do this. It just happened because the economy fell into a recession and incomes fell. Of course, we could cut spending, but that would weaken our military during a time of fragility and could actually exacerbate the economic downturn as we fire more government workers. This is probably silly and unnecessary so we decide to keep spending the $600B, but now because of our income shortfall we end up with a deficit. If tax receipts grow by 5% for the next 5 years we’ll have run up a nice little $239B tab over those 5 years.  Over time our deficit will turn into a surplus and we might even pay the debt back.

And the kicker here is that if we keep the size of our government spending at $600B then you’re actually fiscally conservative because you’re reducing the size of the government relative to the economy as we approach 2020. In other words, you can run a budget deficit and still be reducing the size of government spending relative to the size of the economy thereby making you a fiscal conservative.

This natural ebb and flow of the deficit is called “automatic stabilizers”. There’s nothing discretionary about it. It just happens because the economy grows and contracts. In good times tax receipts reduce the size of government and in bad times the decline in tax receipts automatically expands the size of government. If you have some government and you recognize the lunacy of cutting government spending in a downturn just for the sake of “fiscal responsibility” then you accept the reality of Keynesian Countercyclical policies.² That’s right, if you accept basic common sense economics then you’re a Keynesian who believes that countercyclical government policy is actually a good thing and a necessary good. Being pro market and accepting the basic math of an economy with some government doesn’t make you fiscally liberal. It just means you understand the basic math of a market based economy with some level of government.

Of course, how far you want to go with the expansion of government spending is a whole different ballgame. There are people who take this basic Keynesian premise and want to expand it into something much more closely resembling socialism, but don’t mistake that for Keynesianism. A real Keynesian just accepts the basic math of an economy with SOME level of government and recognizes that this isn’t all evil. But they also accept that the size of government expands and contracts, and given the occasional deep contraction the size of the government deficit can remain large for long periods of time (like we saw coming out of the financial crisis).  It’s just a side effect of the natural ebb and flow of the economy. And a real Keynesian embraces the deficit as a naturally occurring and supporting counterbalancing effect during downturns so long as there’s also a counterbalancing reduction during good times.

But my basic point here is that the economics are really very simple. Countercyclical Keynesian economic realities make many of the Conservative or Libertarian platforms simply unrealistic. You can’t run permanent budget surpluses without potentially driving your economy into deep economic holes. You can’t always be fiscally responsible. And in fact, being fiscally responsible when the private sector is in a recession might actually exacerbate the private sector’s problems.  If there’s one lesson we’ve learned from Europe’s austerity measures in the last 7 years it’s that this thinking is absolutely dead right.  But importantly, accepting this reality doesn’t make you fiscally liberal. In fact, you can be in favor of less government intervention in the economy while still accepting the reality that a deficit might occur by no choice of your own at times.

So, while I definitely wouldn’t call myself a true Libertarian I would say that I am a social Libertarian who has a very realistic economic view of the world.  In this sense, I guess you can call me a Pragmatic Keynesian. It might sound like an oxymoron, but it’s really not. In fact, given that most Americans identify as socially liberal and fiscally conservative I think this view describes what most Americans actually are. Unfortunately, no one in politics really identifies with these views which might explain why so many people are dissatisfied with our current political options.

¹ – See “Common Myths About Keynesian Economics“

² – Automatic stabilizers might not be considered fully Keynesian by everyone since they’re not fully discretionary. I wouldn’t agree with this assertion. I would argue that an initially discretionary decision (such as unemployment benefits, which will increase in recessions and contract in expansions) that becomes permanent doesn’t make it non-discretionary. A Keynesian, therefore, is anyone who believes in the utility of countercyclical economic policies in both expansions and contractions. I would further argue that the most basic “Keynesian” policy is any countercyclical policy that supports a deficit during contractions and surpluses during expansions.