Faith-based economics: Keynes makes a comeback, but his ideas are still wrong.(John Maynard Keynes)(Viewpoint essay)

A RECENT Wall Street Journal article describes "the new old big thing" in economic policy: "Around the world ... policy makers are invoking the ideas of British economist John Maynard Keynes ... who argued that governments should fight the Great Depression in the 1930s with heavy spending." In the New York Times Magazine, Robert Skidelsky appoints Keynes "man of the year." Robert Reich, labor secretary under President Clinton, praises the "rebirth of Keynes."

Long before Keynes published The General Theory of Employment, Interest and Money in 1936, he was a highly persuasive and witty writer on economic issues, often appearing in London newspapers and talking on the radio. But that was very long ago, and Keynes died in 1946. Economics has since become less reliant on armchair theorizing and more deeply grounded in statistical fact.

Using quaint Keynesian arguments to rationalize heavy spending is nothing new. But its resurgent popularity is somewhat surprising. Democrats and their favorite economists spent the past 25 years bemoaning the "twin deficits" of the 1980s and then claimed that the strong economy of the late 1990s was the result of President Clinton's fiscal restraint--the precise opposite of "fiscal stimulus." Also working in the anti-Keynesian mode, former treasury secretary Robert Rubin co-authored a 2004 paper with forecaster Allen Sinai and Peter Orzsag of the Brookings Institution, who now has been tapped by Obama to lead the Office of Management and Budget. They argued that "budget deficits decrease national saving, which reduces domestic investment and increases borrowing abroad." Big budget deficits, warned Rubin, Orzsag, and Sinai, would "reduce future national income" and risk a "decline in confidence [which] can reduce stock prices."

Democrats' anxieties about future deficits had abated only slightly by January 2008, when the incoming head of the Congressional Budget Office, Douglas Elmendorf, co-authored a Brookings paper with Jason Furman, nominated deputy director of Obama's National Economic Council. They strongly favored monetary stimulus over fiscal stimulus, and they warned that "it is critical that efforts to fight a recession do not end up increasing the long-run budget deficit and thus harming long-run growth." Elmendorf and Furman rightly noted that "the idea that Congress should make legislative changes to tax or spending policies in order to counter the business cycle has fallen into disfavor among economists."

In November 2000, for example, Skidelsky wrote in The Economist that "what survives today of Keynesian economics is ... Keynes's intuition that ... the source of instability lies in the logic of financial markets." In other words, not much. Skidelsky noted that "monetary policy has supplanted fiscal policy as a short-term stabilizer." And he concluded that deep experience with governments' "capacity for error and folly suggests that discretionary policy should be used very sparingly."

Many of the economists who repeatedly prophesied in ominous fashion about the dangers of relatively trivial deficit spending during the Reagan and Bush years have inexplicably become enthusiastic supporters of deficits likely to exceed 10 percent of GDP during the Obama administration. If asked about this remarkable political agility, they would probably say their change of heart comes because (1) some forecasters now say this recession is going to be extremely long and deep, and (2) the Fed doubled the monetary base (bank reserves and currency) from September to December, but that action did not produce instant recovery.

John Kenneth Galbraith had advice for the first point: "Never base policy on a forecast." As recently as August, some prominent forecasters were warning of runaway inflation and urging the Fed to tighten. Forecasters failed to predict the financial crisis in September and today have no idea how long or how deep the recession will be. They're making guesses.