My family greatly enjoyed “Ant-Man and the Wasp” last weekend, and I would recommend it as breezy summer fare. The funny line that stood out the most came about halfway through the film, when the protagonists are talking scientific mumbo-jumbo about the “quantum realm.” At one point, the character Scott Lang, played by Paul Rudd, says something to the effect of, “Are you guys just adding ‘quantum’ before everything you say?”
That resonated because I sometimes feel that way about how people write about foreign and economic policy. Wonks love, love, LOVE to put the term “geopolitics” in everything — even if it makes zero sense. Pundits confuse “tactics” and “strategy” constantly, and if that aggravates me, I can only imagine what it does to hardcore NatSec folk.
Another word I have seen abused mercilessly is “Keynesian,” which brings me to the Hoover Institution’s Richard Epstein. Epstein is trained as a lawyer, not an economist. In an essay on the Hoover website, however, Epstein wrote a “best of times, worst of times” essay about President Trump’s economic policy.
The worst of times is Trump’s trade policy, and I am in full agreement with Epstein on that front. The best of times is Trump’s domestic economic policy, however, and it is here Epstein uses the word “Keynesian” in an odd way:
On the domestic front, Donald Trump has largely followed, to great positive effect, the classical liberal playbook, which spurs growth through a combination of low taxation and market deregulation. Under Trump’s leadership, removal of the government’s heavy foot from the throat of the economy has paid off. The key move was to junk the popular Keynesian paradigm with its flawed assumption that one or more low-interest economic stimulus programs could spend the United States back to prosperity. But these glorified transfer programs only take from Peter to pay Paul. Their net effect is virtually always negative. Making money cheap encourages borrowing, but it also discourages lending, creating at best a wash. The administrative costs of aggressive monetary policy, coupled with high levels of economic uncertainty it engenders, are a net drag on the overall economy, leading to the anemic growth levels and relative wage stagnation of the Obama years.
In contrast, neither Trump’s rollback in domestic regulation nor his implementation of lower corporate tax rates indulge in these legislative shenanigans.
Here’s my gut response to how Epstein uses “Keynesian”:
Here’s my more developed response: What in the hell is Epstein talking about?
You can say a lot of things about the Trump administration’s domestic economic agenda, but you know what word best describes it? Keynesian. In the past 18 months, this administration has signed off on a massive tax cut and a massive increase in government expenditures. As Vox’s Tara Golshan summarized it, “The deal lifts funding for domestic programs by $128 billion and hikes defense budgets by $160 billion.”
That is a classic example of expansionary fiscal policy. Consistent with previous cases of Keynesian fiscal expansions, it leans heavily on tax cuts and boosts in military spending. This has happened so often, in fact (early 1960s, early 1980s, early 2000s), that Thomas Oatley labels it “military Keynesianism,” and he is right. Or, to use Epstein’s language, the government’s foot has become heavier; it is just that it is borrowing more money to finance the foot rather than using tax revenue.
So what is Epstein talking about when he is talking about Keynesianism? He seems to be referring to the Federal Reserve’s expansionary monetary policy, including several rounds of aggressive quantitative easing. Oddly, that is almost the opposite of Keynesianism. Because you know who else was unimpressed with expansionary monetary policy during a period of low interest rates? John Maynard Keynes. He analogized it to “pushing on a string,” particularly as interest rates approached zero, which was why he advocated for aggressive, expansionary fiscal policies during the Great Depression.
It is also worth noting Keynes himself would have disapproved of this kind of Keynesian expansion right now (though, regretfully, he would have approved of Trump’s protectionism). Expansionary fiscal policy makes sense in a recession but not in the ninth year of an uninterrupted economic expansion. Nonetheless, that is where we are, which is why the budget deficit is exploding despite bogus claims Trump’s tax cuts would pay for themselves.
A closer read of Epstein’s paragraph above suggests he is mashing together a mélange of different macroeconomic and microeconomic policies that would be identified as on the left side of the policy spectrum. But even a charitable read of it does not suggest the Trump economy is strong because of, say, a policy agenda that spurs innovation. Productivity growth is still, to use the technical term, not good. And the tax cuts are not spurring real investment or wage growth so much as share buybacks.
The economic evidence suggests two facts. First, the Trump economy looks good because of classic fiscal Keynesianism on top of an economy that had been growing for eight years straight. And second, Epstein should never use the word “Keynesian” in a column ever again.