What Did Keynes Really Think of Stimulus?

It is well known that fiscal expansion was used long before Keynes, and I have noted that it wasn’t his main policy conclusion. But what did he actually think of it? Always ambiguous, it is difficult to decipher ‘what he really meant’. But he certainly supported it to some extent, particularly in depressions. Here he is in his letter to FDR:

In the field of domestic policy, I put in the forefront, for the reasons given above, a large volume of Loan-expenditures under Government auspices. It is beyond my province to choose particular objects of expenditure. But preference should be given to those which can be made to mature quickly on a large scale, as for example the rehabilitation of the physical condition of the railroads. The object is to start the ball rolling. The United States is ready to roll towards prosperity, if a good hard shove can be given in the next six months.

Interestingly, in this letter he places fiscal stimulus at the forefront of his analysis, before he goes on to talk about reducing the long-term rate of interest. However, he had been less enthusiastic just two years earlier, saying that he was:

In favour of an admixture of public works, but my feeling is that unless you socialise the country to a degree that is unlikely, you will get to the end of the public works program, if not in one year, in two years, and therefore if you are not prepared to reduce the rate of interest and bring back private enterprise, when you get to the end of the public works program you have shot your bolt, and you are no better off.

This could be interpreted as a fairly harsh evaluation of fiscal stimulus – Keynes did not believe that it alone could ‘kick’ the economy into full employment equilibrium as many of his modern day proponents claim. But why the disparity between the letter and the speech? One reason could be that he changed his views, as he was known to do. However, here is another instance of him being skeptical of fiscal expansion, this time in 1941:

Although the U.S. was not yet at war, Keynes urged increased fiscal restraint in the U.S. in order to be better prepared to prevent inflation resulting from our defense build-up and Allied purchases of war materials…Walter Salant and Don Humphrey, who sat opposite Keynes at the inside of the U-shaped table, argued strongly that increased fiscal restraint was not then needed in America as it would inhibit further progress in reducing unemployment…Finally Keynes, obviously somewhat displeased, pushed his chair back from the table and brought the debate to an end as he said, rather sharply, “On this point you are more Keynesian than I.” It was an electrifying moment, never to be forgotten!

Personally, I think the reason for the disparity between the letter and other times is two-fold:

(1) Keynes advocated stimulus more strongly in periods of severe depression, such as 1933.

(2) Keynes’ letter to FDR was actually incredibly critical, particularly of the NIRA, and Keynes was at pains to stress his sympathies:

You may be feeling by now, Mr President, that my criticism is more obvious than my sympathy. Yet truly that is not so. You remain for me the ruler whose general outlook and attitude to the tasks of government are the most sympathetic in the world.

Thus the slightly overstated support for fiscal expansion may well have been politically motivated.

Overall, it is clear that Keynes remained more concerned with monetary policy, which is why he was devoted to reducing rates at the Bank of England, despite the massive austerity program at the time. Keynes viewed fiscal stimulus as a short-term stop-gap more than anything; viable to get the economy going and keep people in employment, but not sustainable in the long run. In many respects, this would resonate more with Keynes’ modern day opponents than his supporters.