Deficit Deal Primer

In 1934, after meeting with John Maynard Keynes, FDR said that he “liked him immensely” but groaned that he talked like a “mathematician.”

Keynes’s advice to FDR? Described by Sylvia Nasar in Grand Pursuit, increase deficit spending from $300 to $400 million a month in order to spike the national income. Not entirely convinced, FDR partially, and just for awhile, implemented a Keynesian approach.

The Economic Lesson

Now, three-quarters of a century later, we remain divided about whether to embrace or abandon Keynesian spending.  And this takes us to the Super Committee appointed by President Obama as a part of the August debt ceiling deal. Unrestrained by political realities, the 6 Democratic committee members probably would implement large Keynesian deficits to fight unemployment. On the other side, the 6 Republicans would diminish government spending to fuel growth.

Our purpose right now is not to see how they might compromise but instead to understand what will happen if they do not. We just have to remember 2 things: November 23 and DDMM.

• November 23? The deadline. They have to have a deal by then. If they do not, then…
• DDMM. Automatic cuts will slice spending for Defense, Discretionary budget items (such as education), Mandatory spending (like agricultural subsidies) and Medicare.

Here is a NY Times graphic that details DDMM.

An Economic Question: How might John Maynard Keynes have responded to the automatic cuts for “DDMM?”