The famous quote is “We’re all Keynesians now” credited to Milton Friedman and/or Richard Nixon. Or as Paul Krugman wrote in 2011, “Keynes was right“.
What they mean is that — in an economic downturn — there’s a general consensus among economists, policy makers, and monetary leaders that the government should engage in expansionary policies, increasing the federal deficit and enlarging the money supply. As Keynes said: “The boom, not the slump, is the right time for austerity.”
As someone who was once an unrepentant deficit hawk in the style of the Concord Coalition, I have to admit that these types of policies have established a track record of easing economic pain in the short run. It’ s made me reconsider some of my most dearly-held beliefs.*
But it also begs the question: Where are the calls for austerity now? This is the boom that Keynes was talking about. To be consistent, Krugman and all of the Keynesians (i.e., everyone!) should be arguing loudly for decreasing the deficit and tightening the money supply. But that’s not happening.
It’s easy to be a Keynesian during a downturn. Just open up the spicket to placate a panicked populace. It’s a lot harder to do as Keynes recommended and actually tighten things up when the party is underway.
*As an aside, there is no doubt in my mind that the expansionary policies of Bernanke and Obama helped ease the pain, and perhaps prevented a much more significant downturn, during the Economic Crisis. That said, I still feel very ambivalently about those policies. The crisis was caused — at least in part — by incredibly loose monetary policy and incredibly large budget deficits under George W. Bush. Seemingly, we were able to avoid a Depression by (1) making monetary policy even looser, (2) increasing federal spending at a time when the deficit was already historically high, and (3) transferring billions of dollars of debt from private entities to public ones. That’s a troubling pattern… We may have only been successful in kicking the can down the road.