Keynes’s economics and the question of public debt

Abstract

The Global Financial Crisis generated renewed interest in the relevance of John Maynard Keynes’s economic policy proposals, particularly those related to budget deficits, public debt and government expenditure. ‘Keynesian’ economic policies are commonly understood as entailing short-run fiscal activism, by which is meant discretionary, counter-cyclical fiscal policy together with deliberate budget deficits. However, this was not Keynes’s actual position. In the General Theory Keynes contended that demand-deficiency was a permanent problem in a modern capitalist economy. Seen in this light, Keynes’s central policy concern was with maintaining full employment through a permanent enlargement of the public sector and associated public expenditures. Keynes also held a rather conservative view towards public debt and was opposed to debt-financed current expenditure. This thesis reappraises Keynes’s policy views by reference to the relevant primary and secondary materials. Particular attention is given to Keynes’s much neglected policy writings contained in the 1942-45 Treasury Memoranda. The core logic of Keynes’s policy position is then captured in an illustrative model of a demand-led economy. Keynes’s central policy objectives are represented by requiring that the growth in public expenditure is sufficient to maintain full employment, but subject to a debt sustainability constraint.