U.S. Fiscal Policy, Keynes, and Keynesian Economics

It is now half a century ago that The General Theory exploded onto the scene and set the stage of macro economics for a generation to come. Central to the new vision was the proposition that good micro intentions may yield bad macro results, that the economy may get stuck in underemployment equilibrium, and that fiscal policy (deficit finance) offered the avenue of escape. Monetary policy, still dominant in Keynes's Treatise, thus lost its role as the key instrument of macro management, disqualified by the disabilities of an infinitely elastic L and/or inelastic I function. The early Keynesian view, not entirely shared by Keynes himself, exaggerated fiscal dominance and monetary futility. Monetary policy, however, came to be reinstated two decades later in the neoclassical model of the 1950s and 1960s. Added concern with growth further called for reinterpretation of the appropriate fiscalmonetary mix, and the advent of inflation changed the dimensions of macro policy. Nevertheless, fiscal policy has retained a key role. Not that this key role has been a matter of pure economics only. Whereas monetary policy operates in what appears (although may not be) a rarefied atmosphere of political detachment, fiscal policy clashes head on with such controversial issues as the size of the budget and the question of who should pay. While I tried some decades ago to separate