An Unhealthy Alliance: Supply-side Economics and Keynesianism

N. Gregory Mankiw, a Keynesian economist and former adviser to President George W. Bush, has, for the past three-and-a-half years, taken staunch criticism for his support of the president's tax cuts. Many of the people who argued that he compromised his economic principles to appease his boss would probably consider themselves Keynesian. (Paul Krugman is one such example.) If they want to argue that the tax cuts were probably not the best plan in as far as they widened the national deficit, creating a debt that will take generations to pay off, I would agree. But the argument that Dr. Mankiw compromised his principles are, according to my limited knowledge of economics, fallacious. I would expect Dr. Mankiw to advise the tax cuts not in spite of his Keynesianism, but rather because of his Keynesianism--Let me try to explain.

It is true that Keynesians strongly believe that the government has a valuable impact on the economy which should be exploited to the fullest degree, but, unlike certain libertarians would have us believe, Keynesians do not fundamentally and unequivocally believe in raising taxes in every situation. On the contrary, Keynesians believe that there is a time for raising taxes and a time for cutting them. During a recession, the textbook Keynesian solution for reinvigorating the economy is Expansionary Fiscal Policy; in other words, a Keynesian economist asserts that in these troubled times the government should simultaneously increase spending, to get people working again, and cut taxes, to increase expansion in the business sector.

With this in mind, let us consider the situation in late 2002, when Dr. Mankiw supported President Bush's tax-cuts. At the time, the country was ending its second year of recession, following the panic that had been brought about by the 9/11 attacks. Unlike his critics assert, Dr. Mankiw did not fall for the supply-side myth that the tax cuts, in the long-run, would increase government revenues, but, in keeping with his Keynesianism, endorsed the tax cuts hoping that they might galvanize economic growth. Arguably, they did. By the end of 2003, even with the war in Iraq, the U.S. market value had reached another all-time high. But our deficit had expanded, too, and it continues to expand. So much so that Alan Greenspan has expressed regret for his support of President Bush's tax policies, stating that he had hoped that the Republicans would have been more "conservative" on spending.

My main point is not to vindicate Dr. Mankiw for his actions. In retrospect, I would not have supported the tax-cuts if I were he. The point is that Keynesians and supply-siders, despite the disdain they often express toward one another (interestingly, in a 1998 textbook, Mankiw once referred to certain supporters of supply-side theories as "charlatans and cranks" though he removed the phrase in later editions) are actually much closer than they are willing to admit. Who knows? Perhaps one day they will be considered members of the same economic school.