Paul Krugman really, really, really wants to believe that government spending in excess of receipts is a proven remedy for lackadaisical economic performance.  He laments that the Obama stimulus package wasn’t enough to stimulate demand and thereby increase employment levels, from his column in today’s (Dec. 27, 2011) New York Times:

In declaring Keynesian economics vindicated I am, of course, at odds with conventional wisdom. In Washington, in particular, the failure of the Obama stimulus package to produce an employment boom is generally seen as having proved that government spending can’t create jobs. But those of us who did the math realized, right from the beginning, that the Recovery and Reinvestment Act of 2009 (more than a third of which, by the way, took the relatively ineffective form of tax cuts) was much too small given the depth of the slump. And we also predicted the resulting political backlash.

So the real test of Keynesian economics hasn’t come from the half-hearted efforts of the U.S. federal government to boost the economy, which were largely offset by cuts at the state and local levels. It has, instead, come from European nations like Greece and Ireland that had to impose savage fiscal austerity as a condition for receiving emergency loans — and have suffered Depression-level economic slumps, with real G.D.P. in both countries down by double digits.

But there has been much more Keynesian stimulus afforded the US economy than is represented by the roughly trillion or so dollars of the Obama stimulus package.  Keynes, as Krugman points out, believed deficit spending by the government during economic contractions held the possibility of getting things humming while whatever frictions resulting in the slump were smoothed over.  Forget the Obama stimulus.  How much deficit spending has obtained since 2008?  The annual deficit level, from FRED, the St. Louis Federal Reserve Bank’s database:

Graph of Federal Surplus or Deficit [-]

Deficit spending went from roughly $200 billion dollars prior to the recession, to $1.4 trillion almost immediately as the economy contracted, an amount representing roughly 10% of the GDP, and a level of deficit spending relative to GDP not experienced since World War Two.  It would be hard to imagine any more spendthrift Keynesianism could have obtained.  And it continues.  Annual deficits are not expected to dip below $1 trillion dollars in the near-term future, and as the following chart shows, federal debt is now at roughly 100% of annual output, more than doubling over the course of a decade, and is now at a level approaching what economists Reinhart and Rogoff identified in This Time is Different as the danger zone for government default. 

Graph of Federal Government Debt: Total Public Debt

The deficit spending doesn’t even account for the massive stimulation engineered by the Federal Reserve, mostly through expansion of its balance sheet and holding short-term rates near zero.  In July of 2007, the Fed held assets of roughly $880 billion.  Today, after its mortgage bond buying spree and others, it holds assets nominally valued at just under $3 trillion ($2.92–click here to view a neat interactive graphic from the Wall Street Journal). 

It’s hard to see how Keynes’ ideas could have been more faithfully followed. 

It should be noted that deficit spending and monetary machinations are flip sides of the Keynesian stimulative coin.  Each is founded on the premise that economic systems can be effectively managed to yield desirable outcomes, an as yet unproved premise.  The idea that real economic outcomes can be determined by this or that level of deficit spending by the government relative to output, or by this or that level of economic monetization seems to have arisen from the altogether human impulse to hubris in calculating its control over its fate.   A simple glance at the first chart, showing expansions and contractions (shaded areas) relative to deficit spending yields the inescapable conclusion that deficit spending and economic growth do not always  appear together (actually, on any significant scale, it was only once, during the late eighties and nineties), so can not enjoy a causative relationship.  Without correlation, there very simply can’t be causation.  Neither do the Fed’s monetary machinations seem to have much impact on economic performance, as the following chart indicates:

Graph of Effective Federal Funds Rate

Rates seem to go down during times of economic contractions, and generally increase during times of expansions (except in the mid-70’s and early eighties recessions), so there appears to be some correlation between Fed Funds rates and economic performance, but the causation likely runs from economic performance to the Fed’s rate setting, not the other way around.  In any event, growth has resumed with the Fed Funds rate at roughly zero for the last three years, which according to the Fed, is where it will stay for at least the next year.

But has any of this Keynesian stimulating helped employment, the focus of Mr. Krugman’s concern?

Graph of Civilian Employment

Employment levels are roughly where they were (140m) about five years ago, before the recession and the massive stimulus.  They’ve not declined further, but are a long way from recovering lost ground, and in the meantime, the total potential workforce continues to expand:

Graph of Civilian Noninstitutional Population

Keynes was perhaps not as Keynesian as Mr. Krugman.  He recognized the limits of his own prescriptions better than his acolytes today, a couple of his observations from The Economic Consequences of the Peace:

The great events of history are often due to secular changes in the growth of population and other fundamental economic causes, which, escaping by their gradual character the notice of contemporary observers, are attributed to the follies of statesmen or the fanaticism of atheists.

The disruptive powers of excessive national fecundity may have played a greater part in bursting the bonds of convention then either the power of ideas or the errors of autocracy.

Everybody conveniently ignores Keynes’ observations on population dynamics and how demographics drive economic destiny, but given his keen wisdom, and the state of European, Japanese, and to some extent, American demographics, it would be hard to imagine that Keynes would recommend anything more than has already been undertaken in the way of stimulus (never mind for the moment how ineffectual it may have been).  Greece and Ireland could try Keynesian borrowing, but how would it ever be repaid by their aging, declining populations?

And finally, Keynes well understood that the particular form of Keynesianism practiced by the Fed’s monetarists, i.e., inflationism, is a particularly repugnant species of fraud that serves to weaken the foundation of capitalism:

By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security, but at confidence in the equity of the existing distribution of wealth. Those to whom the system brings windfalls, beyond their deserts and even beyond their expectations or desires, become ‘profiteers,’ who are the object of the hatred of the bourgeoisie, whom the inflationism has impoverished, not less than of the proletariat. As the inflation proceeds and the real value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery.  Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.