The Comeback Keynes

Friedman wasn't a Keynesian at all. He distrusted government and didn't believe that bureaucrats could fine-tune the economy for long. His student Lucas offered another criticism: for Keynesian fiscal policy to work, taxpayers had to be awfully shortsighted. Otherwise, they'd see that deficit-financed tax cuts or government spending would eventually have to be paid for, and they'd set money aside for that rainy day--thus counteracting the stimulus.

The out-of-control inflation of the 1970s wreaked havoc with Keynesian fine-tuning and seemed to confirm the criticisms of Lucas and Friedman. But their victory was never complete. The U.S. economic boom of the 1980s was at least partly the result of deficit spending. As financial crises battered much of the world in the 1990s, governments turned to tools devised by Keynes simply because other approaches didn't work. And behavioral economic research has since shown that most humans are awfully shortsighted.

There are aspects of Keynes that haven't worn so well, his disdain for long-run economic considerations among them. ("In the long run we are all dead," he wrote in 1923. He would make it to 1946, but we're all still here.) When there's an immediate crisis to battle, though, Keynes makes for a reassuring companion. While he is sometimes depicted by U.S. conservatives as a wild-eyed socialist, his actual mission in the 1930s was to save capitalism. Now that capitalism may need saving again, is it any wonder that we turn again to Keynes?

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