Keynesian economics is a school of thought associated with the theories developed by British economist John Maynard Keynes and most associated with the economic policies implemented by President Franklin Delano Roosevelt to address the Great Depression. According to Keynes, government can stimulate a lagging economy by manipulating aggregate demand (thus Keynesian economics is often referred to as “demand-side economics”). There are numerous tools government can use to manipulate aggregate demand, including raising or lowering interest rates (to encourage saving or spending by consumers); changing the marginal tax rate or offering greater tax credits (again, to potentially encourage spending); expanding benefits such as Social Security or veterans’ benefits, or indexing those benefits to inflation (again, to encourage spending); or job creation, in which the government has a direct role as an employer (as was the case with Roosevelt, and with later programs such as AmeriCorps), or where the government attempts to indirectly create jobs by allocating funds to state or local governments, or to the private sector, with the expectation that these funds will be used for projects that will create employment.
Applications of Keynes’s theory have generally revolved around the notion that in poor economic times, the government should be free to spend money to help the nation recover, primarily through some combination of efforts to stimulate aggregate demand. In times of a robust economy, however, government efforts are less needed, and this is when taxes should be raised to pay down debt accrued during past recessions, or to put aside for future times when government assistance may be needed.
Keynesian principles guided much of American economic policy throughout the twentieth century, beginning with President Roosevelt’s first term. (FDR’s predecessor, Herbert Hoover, had rejected more than minimal government intervention in the economy during the Depression in the belief that, given enough time, any market economy, however stressed, would correct itself, a position that he held at the cost of reelection.) Following World War II, the Roosevelt New Deal and the principles of Keynesian economic theory emerged as the dominant theoretical perspective guiding national policy. Republican and Democratic presidents alike hewed to Keynesian policies through the 1970s, with Republican Richard Nixon famously claiming, “We are all Keynesians now,” as he adopted a series of wage and price controls (to limit aggregate demand and slow the inflation rate) during the 1970s and considered implementing a guaranteed minimum income.
The major challenge to Keynesian policies came during Republican Ronald Reagan’s campaigns for the White House. Reagan was unsuccessful in his efforts to win his party’s nomination in 1976, but he went on to win the presidential election in the Campaign of 1980. Reagan’s supply-side approach (originally criticized by rival George H. W. Bush as “voodoo economics”) provided Republicans with an alternative approach to economic policy, and it was later embraced by Republican nominee George W. Bush in the Campaigns of 2000 and 2004 (and, to a somewhat lesser extent, by John McCain during the Campaign of 2008). The supply-side approach to economic policy continued to dominate the Republican Party agenda in the Campaign of 2012, as the party unified behind the budget proposals of Wisconsin representative Paul Ryan. The Democratic nominee, incumbent president Barack Obama, demonstrated an affinity for the tenets of Keynesian economics, particularly in his stimulus plan that provided federal funds to states to protect the jobs of state employees and to spur hiring on construction projects, the government-backed loans to the failing domestic automobile industry, and his opposition to the George W. Bush–era tax cuts for wealthier Americans (on the grounds that their aggregate demand is unaffected by the cuts, and that their tax dollars are needed to fund aid programs for less affluent Americans). Critics of Keynesian politics argue that such policies have contributed to unsustainable levels of national debt, and that fewer regulations on business are a more efficient means of producing economic growth.
Keynes, John Maynard. The Essential Keynes. Penguin Classics. Edited by Robert Skidelsky. New York: Penguin Books, 2016.
Rauchway, Eric. The Money Makers: How Roosevelt and Keynes Ended the Depression, Defeated Fascism, and Secured a Prosperous Peace. New York: Basic Books, 2010.
Skildelksy, Robert. Keynes: A Very Short Introduction. New York: Oxford Books, 2010.