WEHT small government Keynesianism?

Russ Roberts says something intriguing:

Krugman is a Keynesian because he wants bigger government. I’m an anti-Keynesian because I want smaller government.

Paul Krugman himself has already replied to this. But for me, there’s a question here: why is there this empirical correlation between attitudes towards Keynesianism and towards the size of government?

I ask because, as Mark Thoma has said, “there is no necessary connection between the size of government and Keynesian stabilization policy.”

For example, one could believe that government spending should average (say) no more than 20% of GDP, and yet at the same time favour large discretionary changes in tax or spending to stabilize the economy. “Small government Keynesianism” is not, prima facie, illogical.

Alternatively, one might favour big government precisely because one is sceptical about the ability of discretionary policy to stabilize the economy, and so a large state is needed to provide automatic stabilizers; Dani Rodrik has made just this point.

So, why are there so few small government Keynesians or big government anti-Keynesians?

One reason, I suspect, lies in public choice economics. It’s politically easier for governments to increase spending and borrowing in bad times than to cut them in good times. This means that Keynesian policies contain a tendency for a creep towards big government. Libertarians might regard the cost of this as exceeding the benefit - especially if they agree with Lucas (pdf) that the benefits of stabilization are paltry.

There is, though, something else. Keynes himself was a small(ish) government Keynesian, because he thought goods and labour markets were, to adapt Samuelson’s dictum, micro efficient but macro inefficient:

I see no reason to suppose that the existing system seriously misemploys the factors of production which are in use. There are, of course, errors of foresight; but these would not be avoided by centralising decisions. When 9,000,000 men are employed out of 10,000,000 willing and able to work, there is no evidence that the labour of these 9,000,000 men is misdirected. The complaint against the present system is not that these 9,000,000 men ought to be employed on different tasks, but that tasks should be available for the remaining 1,000,000 men. It is in determining the volume, not the direction, of actual employment that the existing system has broken down.

This view, however, is not one we hear much of these days. People who believe markets are micro efficient seem to think they are macro efficient too. And “Keynesians” are apt to think markets are micro inefficient as well as macro inefficient - or at least they are keener to point out inefficiencies than efficiencies.

And this leaves me with questions to which I honestly don’t really know the answers. Is  Keynes’ “micro efficient, macro inefficient” view tenable, in which case an interesting position has been lost, perhaps usurped by loud tribalism? Or was he just wrong?

Comments

[Tim Worstall]

"One reason, I suspect, lies in public choice economics. It’s politically easier for governments to increase spending and borrowing in bad times than to cut them in good times. This means that Keynesian policies contain a tendency for a creep towards big government."

That's certainly a large part of it for me. If the Keynesians would argue for automatic tax cuts (say, NI, as Keynes himself suggested might work) as stimulus then I'd have much less problem with the entire idea.

However, "stimulus" always seems to mean politicians spending more on their client groups which makes me instinctively uncomfortable.

[Leigh Caldwell]

Macro arguments are hard to make persuasively because the macroeconomy is abstract and counterintuitive.

So rhetorically, those who want to argue for macro inefficiency may end up using micro inefficiency arguments to do so. Witness the current trend to use individual irrationality arguments as an argument for general market failure.

In general, this may be a simple consistency bias: if you believe in micro inefficiency you're more likely to believe in macro inefficiency and vice versa.

I suppose also because people who believe in micro efficiency are more likely to see the distortions of Keynesian public spending to be a big risk, and therefore to support monetary policy instead. Though one could imagine them arguing for stabilisation through taxes and transfers only, not government spending.

[Keith]

There is nothing wrong with Keynes' distinction; as a general approach, but it is also true I think that in a severe demand short fall Income tax cuts ( and corporation tax cuts) are problematic as a stimulus policy as a result of private saving choices. The implication of "How to pay for the War" is that war time demand is high as a result of enormous military spending and requires forced saving while mass unemployment requires dis-saving. But it is likely that tax cuts will increase excess savings in the non government sector during the aftermath of a collapse in private consumption and Investment. So the paradox of thrift arises from the response of private firms and citizens to a macro economic crisis. Keynes is being imprecise here, the market is correctly meeting the utility choices of consumers for real goods yet can fail to balance National saving and Investment at the same time. So there is no exact equivalence between tax cuts and spending increases. More spending is the most optimal policy in a crisis given also the assumption that monetary policy is ineffective in a liqidity trap as is the standard assumption of the Keynesian school from 1936 onwards. Off course the plan in "How to pay for the war" blurs the distinction as forced saving is like a tax rise but one followed by a tax cut paid for by the previous forced saving. It still however puts the State in control of the decision about saving vs dis saving. It is the key idea that in fact the market system cannot be relied on to make this macro decision that is the crux of the General theory. It is also possible to argue that a big state in terms of spending simply makes it easier to change private saving levels and so plan demand. Only the visible hand of the state and its technocratic economic planner Mr. Keynes can plan national saving as there is no automatic mechanism to do so under laissez-faire. The same problems arise with other taxes than Income or corporation tax as the effect on saving of variations in such taxes may be inappropriate given the state of the economy.

[Miguel Madeira]

My theory - keynesianism mades an argument for an activist policy, where the government makes decision about economic policy (raise the expenses todays, reducing next year) instead of simply applying abstract laws (like mantaining a constant budget size).

Then, after we accept that the government should be in the bussiness of analyzing the economy and taking decisions about that (even if the decision is lowering taxes sometimes), we give the qualitative jump for the idea of an interventive government.

[Chris]

In my experience "small government" or "big government" has naff all impact on human freedom. Perhaps this is because all the types of government power that can be used to restrict human freedom are present even in the ideal "small government" (control of police, the armed forces, ability to make laws).

[xl pharmacy]

WEll, I expected something a little bit different but to be honest the statistics and PERCENTAGES I got in here were not enough to analyze what I wanted..

[Moncler Jackor]

I thank thee that I am none of the wheels of power but I am one with the living creatures that are crushed by it.