Economic Scene: Despite Keynesians’ Victory, Economic Policy Holds

Fans of John Maynard Keynes, the renowned early 20th-century economist who developed the theory on how nations could dig themselves out of an economic downturn, have been running victory laps since the collapse last month of the claim by the Harvard economists Carmen M. Reinhart and Kenneth S. Rogoff that economies tend to slow significantly after government debt reaches 90 percent of gross domestic product.

Then, as if on cue, the number-crunchers in Brussels announced last week that the economy of the euro area countries — which have been following a decidedly non-Keynesian path — shrank
yet again at the beginning of the year. It was the region’s sixth quarterly contraction in a row.

The confluence of events provided further evidence of Keynes’s central proposition: when consumers and businesses set out to reduce their debt burden, and private spending and investment stall, it is the government’s job to borrow, spend and pick up the slack.

The claim by Ms. Reinhart and Mr. Rogoff had provided an intellectual foundation to the demand by House Republicans, British Tories and Germans that indebted governments should move quickly to reduce their budget deficits and the burden of debt.

Its demise — at the hands of a graduate student from the University of Massachusetts, Amherst, who discovered flaws in the Harvard economists’ methods — left a more modest assertion in its wake: heavily indebted nations grow more slowly. Yet it is not even clear that debt necessarily depresses growth. The track record from Europe and elsewhere suggests that austerity programs that hold back growth often make the debt burden even worse.

Two economists — Lawrence H. Summers of Harvard, President Obama’s former chief economic adviser; and Brad DeLong of the University of California, Berkeley — proposed in a recent paper that at the rock-bottom interest rates that prevail today, government spending to encourage growth would in fact pay for itself. In the United States, they concluded, it would lighten the nation’s future debt burden — not increase it.

But in many ways it is the worst of times for Keynesian economists. For despite all this intellectual firepower, governments across the industrial world are zealously tightening their belts.

The Italian government has cut its annual budget deficit to 3 percent of G.D.P. last year from 5.5 percent in 2009, and the Irish government has slashed it to 7.6 percent from 13.9 percent. In Britain — which has its own currency and is freer than its euro-area neighbors to set policy — the government of Prime Minister David Cameron reduced the deficit to 6.3 percent of G.D.P. last year, down from 11.5 percent in 2009.

“We will not be able to build a sustainable recovery with long-term growth,” Mr. Cameron said in a speech in March, “unless we fix this fundamental problem of excessive government spending and borrowing that undermines our whole economy.”

The German government is running a budget surplus. And despite the public’s belief that Washington is engaged in a spending spree, the deficit in the United States narrowed to 7 percent of G.D.P. in 2012 from 10.1 percent in 2009.

None of these countries are growing much, mind you. In the United States, unemployment is still stuck at 7.5 percent. In its latest economic forecast last month, the International Monetary Fund predicted that the nation’s economy would grow only 1.9 percent this year, slowed by further budget-cutting.

What explains the gap between theoretical victory and policy defeat? Voters appear to want everything — including more jobs and a smaller deficit. Is resistance to fiscal stimulus simply a matter of political tactics? Do Republicans automatically oppose anything coming from a Democratic administration they loathe?

Economists have articulated other tempting possibilities. One is that moral views are getting in the way of reason: the decisions of both elected officials and voters are driven not by economic research but by a belief in the virtue of thrift drawn from The Ant and the Grasshopper.

Another is that policy serves the interests of moneyed creditors, lenders who fear that heavily indebted governments will be tempted to default, permit higher inflation to erode the debt’s real value or tax the wealthy more heavily in the future.

N. Gregory Mankiw of Harvard, a former chief economic adviser to President George W. Bush, has proposed another reason, rooted in a notion of democratic rule.

“If the goal of government is to express the collective will of the citizenry, shouldn’t it follow the lead of those it represents by tightening its own belt?” he wrote in a recent paper. “If we as individual citizens are feeling poorer and cutting back on our spending, why should our elected representatives in effect reverse these private decisions by increasing spending and going into debt on our behalf?”

E-mail: eporter@nytimes.com; Twitter: @portereduardo

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