The British economist John Maynard Keynes (1883-1946) turns out to have been something of a prophet. He once wrote that “practical men,” as opposed to theoreticians, “are usually the slaves of some defunct economist.” Ironically, the defunct economist who is influencing Barack Obama, his advisers, and his supporters in Washington is Keynes himself.
Like a ghostly presence, Keynes’ ideas are hovering over us. The very notion of a government “stimulus” for the economy originated in Keynes’ 1936 book The General Theory of Employment, Interest, and Money. In it, Keynes spelled out his theory that government could offset the economic ups and downs of the business cycle with “contracyclical” policies—that is, by running surpluses when economic activity is vibrant and deficits during slowdowns.
Keynes’ theories lost some of their luster in the 1970s when the United States experienced “stagflation”—the simultaneous occurrence of high unemployment and high inflation—which wasn’t supposed to happen according to Keynesian theory. Today, though, desperate to justify massive deficit spending, policymakers are resurrecting Keynesian ideas. This represents a triumph of hope over experience. Let’s look at some history.
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