When Expansionary Austerity Is Real

A blog about business and economics.
March 8 2013 12:09 PM

Keynesian Theory Predicts Deficit Reduction Is Expansionary When Interest Rates Are High

MONTREAL, CANADA - MAY 21: Canadian Prime Minister Jean CrTtien answers reporter's question May 21 about his attack against the Conservative Leader Jean Charest during the official campaign visit to the urban community police station for the legislation for guns control in Montreal city

Photo by ANDRE PICHETTE/AFP/Getty Images

Daniel Mitchell has an illuminating, albeit ill-informed post, challenging Keynesians to explain how Canada's economy managed to grow in the nineties during the Crétien-Martin era of spending cuts.

Part of the answer is that the nineties were good times in a lot of places thanks to technology boom. But if you specifically want to know about Keynesian macroeconomic stabilization policy, Canada followed the playbook perfectly—which is exactly what you would expect from a center-left government. What Keynesian theory says about the impact of the budget deficit on economic growth is that a country like Canada with a stable inflation rate and relatively high interest rates should cut its deficit. By cutting the deficit, it's possible to reduce interest rates without sparking inflation. That boosts investment, exports, and durable goods purchases.

What's interesting to me is that right-wing types in the United States like to use Canada as their example of expansionary austerity when the United States of America did the exact same thing at the same time. The problem with citing US fiscal policy in the nineties, I suppose, is that it was undertaken by a Democratic administration and it involved tax hikes as well as spending cuts. But guess what? Canada's deficit reduction was undertaken by a Liberal administration and it involved tax hikes as well as spending cuts. It was the same thing on both sides of the border, and in both cases it's in line with Keynesian predictions. The nineties experience should be a challenege to "supply-side" theory and anti-tax dogma, not to Keynesian ideas about fiscal policy.

Matthew Yglesias is the executive editor of Vox and author of The Rent Is Too Damn High.



The Democrats’ War at Home

How can the president’s party defend itself from the president’s foreign policy blunders?

Congress’ Public Shaming of the Secret Service Was Political Grandstanding at Its Best

Michigan’s Tradition of Football “Toughness” Needs to Go—Starting With Coach Hoke

A Plentiful, Renewable Resource That America Keeps Overlooking

Animal manure.

Windows 8 Was So Bad That Microsoft Will Skip Straight to Windows 10


Cringing. Ducking. Mumbling.

How GOP candidates react whenever someone brings up reproductive rights or gay marriage.

Building a Better Workplace

You Deserve a Pre-cation

The smartest job perk you’ve never heard of.

Hasbro Is Cracking Down on Scrabble Players Who Turn Its Official Word List Into Popular Apps

Florida State’s New President Is Underqualified and Mistrusted. He Just Might Save the University.

  News & Politics
Sept. 30 2014 9:33 PM Political Theater With a Purpose Darrell Issa’s public shaming of the head of the Secret Service was congressional grandstanding at its best.
Sept. 30 2014 7:02 PM At Long Last, eBay Sets PayPal Free
Sept. 30 2014 7:35 PM Who Owns Scrabble’s Word List? Hasbro says the list of playable words belongs to the company. Players beg to differ.
  Double X
The XX Factor
Sept. 30 2014 12:34 PM Parents, Get Your Teenage Daughters the IUD
  Slate Plus
Behind the Scenes
Sept. 30 2014 3:21 PM Meet Jordan Weissmann Five questions with Slate’s senior business and economics correspondent.
Brow Beat
Sept. 30 2014 8:54 PM Bette Davis Talks Gender Roles in a Delightful, Animated Interview From 1963
Future Tense
Sept. 30 2014 7:00 PM There’s Going to Be a Live-Action Tetris Movie for Some Reason
  Health & Science
Medical Examiner
Sept. 30 2014 11:51 PM Should You Freeze Your Eggs? An egg freezing party is not a great place to find answers to this or other questions.
Sports Nut
Sept. 30 2014 5:54 PM Goodbye, Tough Guy It’s time for Michigan to fire its toughness-obsessed coach, Brady Hoke.