Economic plans costing trillions of dollars are not just unusual, they have never existed in United States history. The Biden administration has proposed multiple bills totaling trillions of dollars. This magnitude of spending is unprecedented across all United States’s presidencies – especially in the first few months. Supporters of these plans fall into a particular school of economic theories: Keynesian Economics.
John Maynard Keynes created one of the most prominent models in all of economics. Since its creation in the 1930’s, economists have argued over the efficacy of Keynes’s ideas for almost a century. The significance of Keynesian economics is clear, but what exactly is it?
In his article Keynesian Economics, Alan Blinder defines Keynes’s economic theory as “a theory of total spending in the economy and of its effects on output and inflation.” Blinder also admits that the definition of Keynesian economics is loosely applied, yet there are six characteristics that are unique to the theory:
- Decisions from the private and public sector directly affect the total (aggregate) demand for a given good or service.
- These changes have a larger affect on employment/output rather than prices.
- Prices react much slower than employment does in changes of supply and demand.
Blinder claims that some economists who are not self-proclaimed Keynesians might accept some of these premises. The previous three principles are not necessarily defining Keynesian theory, but stay true throughout. The proceeding three, however, relate to policy and separate the Keynesian school of thought from every other.
- The usual amount of unemployment is both too high and too variable because it depends on demand and slow changing of prices. As opposed to the monetarist economist who trusts in Adam Smith’s invisible hand, Keynesians also believe that recessions and depressions are a symptom of an unhealthy economy and therefore not natural.
- The most important problem in economics is how unstable the business cycle is with its recessions and depressions. Keynesians believe policymakers should aim to create legislation that grows the economy slowly and keeps rates as close to the natural amount as possible.
- Unemployment, not inflation, is generally the most important issue.
In modern discourse, Keynesian has come to simply mean “substantial government spending” or something of the sorts. There are few, if any, examples of a pureblood Keynesian economy since its conception. The lessons the economic theory offers may not be applied in full, but a few are applied often. The first notable use of Keynesian economics in the 21st century was during the Bush administration in 2008. Former president George W. Bush signed the Economic Stimulus Act, a bill totaling $152 billion and acted as a $600 income tax subsidy for the middle and lower class. Following the Economic Stimulus Act was former president Obama’s American Recovery and Reinvestment Act (ARRA), an $831 billion dollar bill for education, infrastructure, employment, healthcare, and renewable energy.
In 2021, President Biden has offered over $6 trillion in potential bills to be passed. Under Obama, Biden served as Vice President. The two worked as a team, so it is clear how Biden arrived at the idea of Keynesian economics to heal the economy amid the pandemic.
There are many reasons the Biden administration defends this absurd spending. Most, if not all, fall in line with Keynesian philosophy. The paradigm of 21st century Democrats has primarily been this enormous spending. Whether this spending was warranted or not cannot be definitively argued, but the pattern is clear. Even after the largest recession since the Great Depression in 2008, Bush approved a bill costing $152 billion. Even though that is still more money than virtually anyone will ever see in multiple lifetimes, Barack Obama signed a bill almost six times larger only a year later. In the modern era, Democrats have clearly favored the Keynesian way of spending. This pattern has only become clearer during Biden’s presidency.
With the monstrous bills President Biden plans to pass, over $6 trillion has already been placed on Keynesian theory winning the biggest economic bet in U.S. bureaucratic history. The reasoning for this spending essentially boils down to “Big spending = big change.” In many small-scale environments, this may be true; and “big change” might be for the better or worse. The question, however, remains, “Does this reasoning also apply to the entire United States economy?”
The answer is no. Kevin Hasset of National Review calls this economic reasoning “De-economics.” Hasset explains that this spending shows that Democrats no longer believe in incentives. He continues by giving an example,
“Under this theory, one can lift the unemployment-insurance benefit to the heavens, and people will still go to work just as they did when the benefit was low. The individual income tax can be lifted, and people won’t respond by working less.”
In his examples, Hasset points out the naivety in pieces of the economic plans. Because incentives and economics go hand-in-hand, the lack of them has been called de-economics. Now, the “paying unemployed people will keep them from working” talking point has admittedly been overused by the right and vehemently challenged by the left. There is, however, plenty of qualitative and quantitative evidence to show that this argument is far from wrong.
One of the most prominent critiques of Keynesian theory is what economists call, “crowding out.” Investopedia defines crowding out as times when the government starts to use more of the financial resources available and “crowds out” the economy, leaving minimal resources for the private sector. Anyone with a basic understanding of economics can recognize how crowding out can cause problems for a society. When businesses are left with little resources to incentivize the public due to government crowding out, the society is functioning sub-optimally.
James Wilson explains why the public sector is less efficient than the private sector in his book Bureaucracy. He claims that, because the government must operate within politics and has no direct profit motive, incentives for optimal performance are much less than those in the private sector. Yet, the public sector still requires the same financial resources that the private sector requires, only to operate inefficiently nevertheless. Crowding out when the government takes a larger share of financial resources is inevitable through Keynesian spending, especially when the proposed plans have only seen conversation this year.
Keynesian economics, a theory that is almost a century old, has been the topic of debate for decades. It is one of the most famous schools of economic thought. It was born during a time of economic crisis in the 1930’s, and it has now been born again during another crisis. The critiques of the theory are extensive. Nobel Prize winner economist Paul Sammuels said it best,
“If government gets too big, and too great a portion of the nation’s income passes through it,, government becomes inefficient and unresponsive to the human needs ‘we do-gooders extol,’ and thus risks infringing on freedoms.”
Despite his unfortunate passing in 2009, Samuelson’s lessons in economics live on. We must not fall into the trap of colossal bills and unfounded deficit spending. Crowding out and inefficiency may be nothing but an afterthought if we continue at the spending rate we are.