Keynes in 2008

WaPo last Sunday ran an Outlook column by a Keynes biographer regarding the current crisis.

Keynesianism broke down because it could not explain why, even with lingering deficits, the economy would go into recession. However, if one factors in the effects of paying interest on the national debt and lags the economic effects by one fiscal year, the effect is discernable. When Republicans are in power, their fiscal policies require running a deficit in excess of net interest in order to get growth. Democrats, because of their fiscal policies can balance the budget and get growth of about 3% on average per year.

The reason the GOP needs to run deficits is that their tax policies reward savers. The only way to move this money back into the productive sector is to borrow it from them, lest it be use for speculation. The Democrats tax the excess savings of the wealthy, so they can afford to reduce the debt without decreasing consumption in the economy.

Here is the equation. Note that you must run it by regime (JFK, Johnson-Nixon-Ford, Reagan-Bush I, Clinton, Bush II):

Growth % in FY+1 = (Deficit/Surplus + Net Interest in FY)/GDP.

Try running the numbers before you say it doesn't work.