Keynes, Keynesians, and Deficits as Policy

“New Keynesianism” is a gross misnomer. The macroeconomics of people like Greg Mankiw and Paul Krugman has theoretically and methodologically a lot to do with Milton Friedman, Robert Lucas and Thomas Sargent — and very little, or next to nothing, to do with the founder of macroeconomics, John Maynard Keynes.

- Lars P. Syll

I have to talk about a Mike Kimel post from back in February 2011 -- his Critique of Tyler Cowen’s The Great Stagnation, by way of Alex Tabarrok’s Criticism of Keynesian Politics. You can see the post at Angry Bear or at Presimetrics. The Presimetrics link is missing Kimel's very important graph, but carries some comments by Mike Kimel that the AB post lacks.

I was introduced to Kimel's post almost three years ago by Jazzbumpa's Accidental Keynesians, and by comments on two other posts at Retirement Blues: Money Illusion Delusion and A Different Look At The Great Stagnation - Pt 2.

Back then I had two problems with Mike Kimel's post: First, his definition of the term "Keynesian". And second, his view that in the 1960s policy was (by Kimel's own definition) Keynesian.

Those problems persist.

Two Problems

Jazzbumpa's recent Republican State of Disunion: Taxes Edition links to Kimel's old post. That's why the subject comes up. Here are my problems with Kimel's post:

1. "What Keynes called for was deficits when the private sector cut back", Kimel says in a comment at Presimetrics, "and surpluses at other times". Yes, that is exactly what Keynes said. But that is not what the policymakers did, who called themselves "Keynesian" in the 1960s. The Keynesians did not think like Keynes.

2. "The fact that the government started running non-stop deficits means that by the very definition of Keynesian economics, it wasn’t following Keynesian policies," Kimel adds. He's right again -- by his definition of "Keynesian". But Kimel says the non-stop deficits started around 1967 "or 70 or 73 or thereabouts (I think 67 but I’m open to persuasion about what date the graph points to)".

That *is* what his graph shows: 1967 or '70 or '73 maybe. But as Basil points out in the first comment on the Presimetrics post, "since ~1960, the US has been running a deficit nearly nonstop."

Basil is right. Kimel disagrees, but Basil is right. The "Keynesian" policymakers of the 1960s used "full employment" budgeting, trying to push economic growth up to "potential" by stimulating the economy with deficits. The 1960s was a decade of deficits.

Not only does Mike Kimel overlook the difference between Keynes and the Keynesians. He also overlooks the policy of the 1960s. He shows a graph that says the US ran balanced budgets through most of that decade.

Hey, definitions are definitions. I can deal with that. But the discrepancy regarding the deficits of the 1960s has been eating at my brain for three years.


Mike Kimel says Tabarrok and Cowen are wrong -- "wrong that Keynesian economics hasn’t been tried, and wrong that it hasn’t worked."

I don't want to argue that point. But I did want to gripe about Kimel's definition of Keynesian economics. And I do want to reconsider Mike Kimel's 1960s.

From Kimel's post:

The following graph may look a bit odd, since it has no curve on it. But it shows something cool. If I did this correctly, the gray bars show periods when:

1.  real private sector spending hit a new high and the government ran a surplus

2.  real private sector spending fell below a previous high and the government ran a deficit

Keynesian governments will generally behave in that way.  The turquoise bars show non-Keynesian behavior:

1.  real private sector spending hit a new high and the government ran a deficit

2.  real private sector spending fell below a previous high and the government ran a surplus

Here’s what it looks like:

Figure 1

The graph is wrong.

On Mike Kimel's graph, the gray areas show times when policy was Keynesian -- or, not "Keynesian", but when policy was in accord with the ideas of Keynes himself. Let's call that "Keynes-like".

On Kimel's graph, the biggest gray area is a stretch that runs from 1955 to 1967. That means policy in those years was Keynes-like. By Mike Kimel's definition, it means the private sector was growing while the government ran a surplus... or the private sector was shrinking while the government ran a deficit.

In the 1960s the economy was growing while the government ran deficits. Kimel's graph is wrong.

One of the things I know without looking is that the 1960s was a time of economic growth. Before the 1980s came along, the 1960s were often held up as the longest period of uninterrupted expansion since the Second World War.

Any chance you remember that?

Kimel's data does show that the economy was growing in the 1960s:

Graph #2: The economy was Growing in the 1960s

And yes, Kimel's data also shows Federal revenue higher than Federal spending almost all through the 1960s:

Graph #3: Kimel's Data Shows a Budget for the Most Part in Surplus

Those source numbers produce the large gray, Keynes-like 1960s on Mike Kimel's Figure 1. But these numbers would have produced a large turquoise area:

Graph #4: The Current Version of Kimel's Data Shows
Expenditure Consistently Greater than Receipts through the 1960s.
In other words, Consistent Deficits.

Here's my problem. I know the economy was growing in the 1960s. I also know that in the 1960s, policymakers used "full employment" budgeting to stimulate further growth. They used deficits. It was policy.

It was Keynesian policy. It was not Keynes-like. There were budget deficits in the 1960s, lots of budget deficits. It was policy in the 1960s to stimulate growth by means of deficits.

There is nothing iffy about this. It was policy.

I have to say this again. The economy grew in the 1960s. Policymakers at the time thought their policy of using deficits to boost growth was working. If the economy was growing, and there were deficits, then Kimel's graph should show turquoise in the 1960s, not gray. There is a problem with his graph. I can't get around it.

Graph #5: The Federal budget "surplus or deficit" was barely above zero in 1960.
It was not in balance again until 1969 under Nixon.

Graph #6: Both the gross Federal debt, and the credit market portion of it,
increase throughout the 1960s. There had to be deficits in those years.

I have to look at Kimel's spreadsheet.

// UPDATE

Mike Kimel writes:

I would request that you immediately put up some sort of postscript indicating that a) I made the spreadsheet available to you as soon as you requested it and b) you could duplicate my results using older data, and please notify me when it is done.

He's absolutely right.

If you visit here often, you may know that I tend to split up a post into several sections. I didn't even think about it. Plus, I wrote some make-nice stuff that later got deleted. So I left a bad impression, and I apologize for that.

Not my intent, Mike. Sorry.

Even though his post is three years old, Kimel found the relevant spreadsheet and sent it to me right away. And I love the spreadsheet. It was done right, so that it was easy for me to plug in the current data. See tomorrow's post: "Kimel's spreadsheet is a beautiful thing".

Oh, and yes: I looked at the older "current expenditures" and "current receipts" at ALFRED and found data that show what Kimel showed -- budget surpluses in the 1960s. This graph:

Graph #7: Federal Budget in Surplus, except 1967 and the last bit.

I looked into that a little more. But that's my post for 11 Feb. Outcome: Kimel's numbers were good in 2011 when he wrote the post, and remained good until the "comprehensive revision" of mid-2013.

One more thing. It's not the changed data that pesters my mind. It is that Kimel used data that showed balanced Federal budgets through most of the 1960s. But the Federal debt grew in the 1960s, so I know there were deficits. Everybody knows there were deficits, I think. So I don't understand why Kimel used the data he used.

Mike, as I wrote to you this morning:

What bothers me is that I know perfectly well the Federal budget was in deficit almost without letup in the 1960s. But you selected data that (until the revision) showed the Federal budget mostly in surplus. I don't understand your choice of data.

I didn't ask for a response, because you said you are busy. Now I'm asking.

It was policy in the 1960s to use "full employment" budgets -- to use deficit spending to stimulate economic growth beyond the growth we already had at that time. As a result of that policy, there were Federal budget deficits in the 1960s.

Mike, please explain to me why you chose to use data that did not show the deficits.