I'd just like to provide a gentle reminder to my progressive friends here that it was Dick Cheney, not John Maynard Keynes, who said that "deficits don't matter":
The line is not likely to make this week's eulogies to Ronald Reagan, but when Vice President Cheney allegedly declared, "Reagan proved deficits don't matter," he summed up an enduring argument from the former president's economic legacy.
In late 2002, Cheney had summoned the Bush administration's economic team to his office to discuss another round of tax cuts to stimulate the economy. Then-Treasury Secretary Paul H. O'Neill pleaded that the government -- already running a $158 billion deficit -- was careering toward a fiscal crisis. But by O'Neill's account of the meeting, Cheney silenced him by invoking his take on Reagan's legacy.
Washington Post, June 9, 2004
John Maynard Keynes did, of course, advocate deficit spending during hard times. But he also advised that the government run surpluses in good times, to save for a rainy day. The savings would then be spent to stimulate the economy when times turned tough. If you do not believe me on this, perhaps you will believe Paul Krugman.
I share the view of Keynes and Krugman on this.
To me, Reagan-- and the Republican administrations that have followed-- have proved just the opposite of what Cheney claimed. They proved that deficits do matter.
During the Reagan and George W. Bush administrations in particular, we unwisely used deficit spending to juice our growth numbers during economic expansions. Our debt grew in size compared to the size of our economy. Most ignored the growing debt or only gave lip service to it when it was politically convenient. Many claimed that having some debt was a good thing, and even warned us of unintended consequences when we considered paying it down during a rare period of surplus in the late Clinton years.
But during this economic crisis, when we really need a big stimulus for a big boost, the chickens finally came home to roost. Politicians balked at the size of the deficits needed to stimulate the economy, and instead there rose a great fear-- not without basis-- that the size of our debt was approaching a level that threatened our future economic prospects as a nation. The result is the quasi-permanent economic slump that we find ourselves mired in.
Deficits do matter. The Federal government has great flexibility in its finances, but it cannot deficit spend without limit and consequence.
Yet amazingly we still have progressives spouting Cheneyite economics and claiming that they are Keynesians. A good example is the rec-listed diary "Protecting the Budget From Ignorant Democrats and Kossacks" from earlier today. The diarist makes the outright claim that government spending is not constrained by the amount of revenue it takes in:
Spending is not revenue constrained. Historically when we’ve had a balanced budget(only 7 periods in our history), it led to a depression or recession or it generated the factors that led to one soon after. And yet we still hear deficit fetishist nonsense from this administration and a lot of other people in their defense, whether well meaning or not. They just don’t understand the federal budget or economic history.
This point of view many no longer be radical, in that it has been adopted by the likes of highly placed officials like Dick Cheney, but it is nonetheless disappointing to see these theories infect progressive economic thinking. It is voodoo economics, not Keynseianism, to make a blanket statement that spending is not revenue constrained. Again, Keynes advocated for not just balanced budgets but surpluses during good economic times. Nowhere did Keynes ever subscribe to this crackpot belief that balanced budgets or surpluses themselves led to recessions or depressions; instead, he believed that it was desirable to run a surplus during good times.
All this perhaps could be forgiven if the diarist were talking about stimulus programs. But the diarist (and the essay that underlies the diary by Galbraith, Mosler, and Wray) apply these so-called Keynesian theories to Medicare, and make the amazing claim that "US government always has the operational ability to make all payments as they come due," so concerns that Medicare is projected to take in far less than it will have to pay out are just fear-mongering-- the government can always just pay the extra claims with money it creates! Why limit deficit spending to the regular budget? the authors of the article ask.
What they are advocating is perpetual deficit spending on permanent programs, not short term stimulus to get the economy moving. If their ideas seem like a good idea to you, you are not a Keynesian.