Another Tidbit from Wolf

One of the curious things I've often wondered about is the vitriol that the current Republican party shows toward Keynes.  I find it odd because it seems clear to me that the Republican supply-side theory of growing the economy by cutting taxes and running deficits, is at base a deeply Keynesian theory.  The distinction between demand-side Keynesianism and a supply-side version seems like a second order one when you consider that both rely on the idea that the government should stimulate an economy that for whatever reason is not operating at fully efficient equilibrium.

To understand modern Republican thinking on fiscal policy, we need to go back to perhaps the most politically brilliant (albeit economically unconvincing) idea in the history of fiscal policy: "supply-side economics". Supply-side economics liberated conservatives from any need to insist on fiscal rectitude and balanced budgets. Supply-side economics said that one could cut taxes and balance budgets, because incentive effects would generate new activity and so higher revenue.

The political genius of this idea is evident. Supply-side economics transformed Republicans from a minority party into a majority party. It allowed them to promise lower taxes, lower deficits and, in effect, unchanged spending. Why should people not like this combination? Who does not like a free lunch?

How did supply-side economics bring these benefits? First, it allowed conservatives to ignore deficits. They could argue that, whatever the impact of the tax cuts in the short run, they would bring the budget back into balance, in the longer run. Second, the theory gave an economic justification – the argument from incentives - for lowering taxes on politically important supporters. Finally, if deficits did not, in fact, disappear, conservatives could fall back on the "starve the beast" theory: deficits would create a fiscal crisis that would force the government to cut spending and even destroy the hated welfare state.

In this way, the Republicans were transformed from a balanced-budget party to a tax-cutting party. This innovative stance proved highly politically effective, consistently putting the Democrats at a political disadvantage. It also made the Republicans de facto Keynesians in a de facto Keynesian nation. Whatever the rhetoric, I have long considered the US the advanced world's most Keynesian nation – the one in which government (including the Federal Reserve) is most expected to generate healthy demand at all times, largely because jobs are, in the US, the only safety net for those of working age.

The post goes on to make clear that the real honest-to-god fiscal conservatives like Mankiw and Friedman don't believe this logic.  They want a smaller government, with the tax cuts balanced by spending cuts, just because they hate the fucking Eagles.