Keynesians in disguise

For the past one hundred years the central economic debate between Republicans and Democrats has revolved around how much the government should tax and spend. Democrats embrace the philosophy of John Maynard Keynes who believes that the government should spend more during recessions, even if it incurs deficits, in order to protect citizens from the spasms of capitalism's creative destruction by providing them with a more robust social safety net. Republicans have embraced the philosophies of Milton Friedman and Supply-Side economists who posit taxes and spending should be cut in order to stimulate economic growth which benefits us all (ie. trickle down economics or "a rising tide lifts all boats.")

This debate usually begins with an argument about the New Deal. Liberal Keynesians will argue the New Deal saved us from the Great Depression. Conservative argue that the New Deal retarded our recovery from the Great Depression and it was only the massive energy released by our entry in to World War II that snapped the Depression's stranglehold on the country's economy. I used to ponder these competing theories and wish I was an undergrad again so I could ask an economics professor. However my question today would be different.

Could our massive military spending during World War II be considered just another type of Keynesian stimulus? Military spending is as much a form of government spending as welfare or jobs programs. Could both the New Deal and military spending for World War II vindicate Keynes's theories?

I think the answer to these questions is most likely yes. And I would add that there is additional evidence to support Keynesian from the most surprising of sources: Ronald Reagan and George W. Bush.

These two supposed fiscal conservatives, while touting imaginary fiscal restraint, actually appear to have embraced Keynes by massively expanding government spending. Spending that happened to be military in nature much like our fiscal policy of the 1940's.

Here are two graphs to illustrate this point.

Notice the two points when debt started to increase exponentially.

But gross debt only tells half the story. Even more striking is how much our debt has exploded over time relative to how much our nation's income, GDP, grew over that same period.

This graph begs the question which Presidents have pursued spending policies beyond our means?

So any claims about Reagan or Bush's economic successes have to be tempered with how they were achieved. It seems likely that they artificially stimulated the economy with deficit spending.

John Maynard Keynes would be proud.