Deficit spending can take one of three forms: tax cuts, spending increases or a combination of the two. Republicans, from Ronald Reagan to George W. Bush, and now clearly Donald Trump, favor large-scale tax cuts while concentrating additional spending on defense procurement.
If the objective is to provide a flagging economy with necessary stimulus, Republican deficit spending is a most inefficient means. John Maynard Keynes objected to large-scale tax cuts for a simple, practical reason: the trickle-down effect is a myth.
The reason that “trickle down” is a myth is that the rich are most likely to save a large part of the tax relief they receive, thus blunting its stimulus potential, or use it to go skiing in Switzerland, rather than to spend it in their demand-deprived community. This is why targeted spending on the poor was [Keynes’s] recommendation: because it stimulates demand much more efficiently.
There is a tradition amongst Keynes’s detractors, especially in the United States, to present him as a sponsor of unconditional, the more-the-merrier, deficit spending.
Nothing could be further from the truth. Keynes advocated deficit spending only under conditions of low demand, low investment, high unemployment and next-to-zero interest rates—in other words, under the circumstances that prevailed in 2009, when Republican lawmakers were opposed tooth-and-nail to deficit spending.
Under all other circumstances (for example, when unemployment is low and interest rates on the rise) Keynes would have cautioned against deficit spending. Indeed, he believed that once the economy rebounds, governments should shift their budget into a surplus.
While it would be suicidal to try to balance the U.S. federal budget via austerity measures most likely to push the economy back into recession, it is clear that the room for using deficit spending to stabilize the economy is severely limited. And it has become so terribly limited because of Republican practices that have been confused, often intentionally, for Keynesian economics.