One Half of John Maynard Keynes

If only it were always Saturday night. But that’s not how life works, especially in economics.

John Maynard Keynes was a British economist, perhaps the most influential of all times. He lent his name to an entire branch of economics, the Keynesian approach, likely the most durable of all economic theories.

Keynes was troubled by the “boom and bust” cycles of Western economies and wondered if there might be a way to tame the ebb and flow of euphoric highs and disastrous lows. In particular, he considered the Great Depression and wondered how best to escape it and to avoid repeats.

At its simplest, the Keynesian model is analogous to a huge reservoir, a dam behind which the water from rain and snow is accumulated during the wet seasons and gradually let out to irrigate dry lands when the rains don’t fall. Not a particularly complicated idea.

Keynes reasoned that if governments could accumulate surpluses in good times by taking in more taxes than they paid out, then in hard times the built up surplus could be distributed into the economy to expand the otherwise available money supply. Exactly like a dam on a great river.

The policy actually works well except for the fact it is administered by politicians, and politicians have one eye on the economy and one eye on the next election. And nothing is more likely to ensure re-election than a hot economy. Lots of money in everybody’s pocket, let the good times roll! So, instead of both eyes on the long-term health of the economy, we’d prefer to goose it in the here and now so that everyone feels wealthy and grateful when they go to the polls. Tomorrow can take care of itself.

This is a little bit like staying drunk. It’s one thing to party till dawn on your birthday or some other worthy occasion, but a never-ending party is neither good for the body or the soul. In the same fashion, high government spending during hard times is the best way to drag the economy out of a recession, much like steering into a skid on ice.

But spending like drunken sailors (with access to your money) when the economy is already hot? It takes no brain surgeon to figure out that not only will you drive up the nation’s deficit, but you’re almost guaranteed to inflame inflation and tank the value of your currency. You don’t need a PhD in economics to understand that.

As the other great economist, Milton Friedman, told us, “There’s no free lunch.”