The specter called 'John Maynard': when will democrats learn that shoveling money around does not stimulate growth?(PUBLIC POLICY)(Essay)

IN a 1965 article for Time magazine on the pervasive influence of British economist John Maynard Keynes, Milton Friedman was quoted as saying, "We are all Keynesians now." This came as a shock--the equivalent of Paul Krugman coming out as a supply-sider today.

Friedman later explained that he had been quoted out of context. He meant that economists had adopted Keynes's "language and apparatus," not Keynes's conclusions, chief among which was that the government should use fiscal policy to steer the economy (for example, cutting taxes and increasing spending to fight economic contractions). Regarding this, Friedman said, "no one is a Keynesian any longer."

Try telling that to Nancy Pelosi. The Democratic House speaker is hard at work on a round of Keynesian stimulus intended to steer the U.S. economy back into the clear. This follows the stimulus that Congress passed, and President Bush signed, last February. But the old stimulus did not prevent the recession, and a new stimulus will not end it.

President Bush signed the old stimulus into law because it consisted mostly of tax rebates. Rebates are slightly preferable to other forms of Keynesian stimulus, but they are still not very effective. One-off rounds of checks mailed to taxpayers in the midst of an economic slowdown tend to be saved, not spent. It is hard to isolate the effects of the rebates, but in polls, just over 20 percent of recipients said they would spend the money, which would account for the small bump in consumer spending seen in the spring.

The best that can be said of the February stimulus package is that it delayed the recession a bit, perhaps. It could not have done more, because it did not address the recession's cause: a convulsion in the credit markets caused by falling home prices and rising mortgage-default rates.

Democrats now claim that a second stimulus--which they have been calling for since June--could address the recession's effects, in particular a recent and rapid drop in consumer spending, which indicates that the problems have spread from the financial sector to the economy as a whole. With that goal in mind, Democrats want the second package to be lighter on the rebates and heavier on the spending--the idea is that while individuals might choose to save rebates, government spending lands directly in the economy.

A veto threat persuaded Democrats to drop most of their spending requests from the last package, but Barack Obama's lead in the polls has them convinced that if Bush won't acquiesce to their demands this time, they can just run out the clock. Democratic congressman Barney Frank has made this explicit. "There's no question the House will pass ... a much bigger [stimulus plan] than we passed before," he told the Associated Press. "If enough Republicans in the Senate decide to filibuster it ... we'll just wait until January."