Back in the seventies, Richard Nixon said, "We are all Keynesians now." He was half right.
Regular readers of this blog (if there are any) recognize that it is written by a confirmed Keynesian (and not one of those Neo-Keynsians either.) I am a Keynesian in large part because the theoretical framework is just so elegant, but also because practical experience has thoroughly demonstrated that supply-side economics just doesn't work. So, if we all were Keynesians back in the seventies, and if Keynesian theory actually works in practice, how did we get into such a mess over the intervening years?
I suppose we could assign some of the blame to supply-siders who came to prominence beginning in the Reagan years, starting with Arthur (Laughable) Laffer*, who posited that cutting taxes would increase tax revenues. Well, he was dead wrong, but that didn't bother Americans (especially the rich) who wanted their taxes cut, and were perfectly happy to take food out of the mouths of impoverished children so it could happen. Still, that doesn't explain the failures of Keynesianism. After all, if it was working properly, it would have been hard to push aside.
The problem is that only half of the Keynes model ever is put into practice — the stimulus half. The other side of the Keynesian coin requires raising taxes and cutting spending when times are good, both to create a surplus for use during downturns, and to cool down an economy when it is overheating. That never happens. (Okay the Clinton tax increases of the nineties were, at least, movement in the right direction — but then came Bush.)
What gets in the way of practicing a little austerity in boom times? Representative democracy.
Elected officials like to be re-elected, so they can continue peddling influence, trading on insider information, and getting their asses kissed. Hence, if times are good and tax revenues are increasing, they inevitably cut taxes and increase spending because they have the money to do it. "Irrational exuberance" inflates the inevitable bubbles, and the next Congress can try to work things out when the bubbles pop.
I can't see any way to break that destructive pattern. Can you?
*Arthur Laffer, discredited though he may be, currently is advising the Romney campaign.