310 PART FouR • PolicymAking
Treasuries
U.S. Treasury securities—
bills, notes, and bonds;
debt issued by the federal
government.
Public Debt, or
National Debt
The total amount of debt
carried by the federal
government.time lag between the recognition of a problem and the implementation of policy to solve it.
Getting Congress to act can easily take a year or two. Finally, after fiscal policy is enacted,
it takes time for it to have an effect on the economy. Because the fiscal policy time lags are
long and variable, a policy designed to combat a recession may not produce results until the
economy is already out of the recession.
Because of the timing problem, attempts by the government to employ fiscal policy in
the last fifty years have typically taken the form of tax cuts or increases. Tax changes can take
effect more quickly than government spending. In 2009, therefore, the Obama administra-
tion was employing an exceptional approach with its economic stimulus spending.criticisms of keynes. Following World War II (1939–1945), Keynes’s theories were
integrated into the mainstream of economic thinking. There have always been economic
schools of thought, however, that consider Keynesian economics to be fatally flawed.
These schools argue either that fiscal policy has no effect or that it has negative side effects
that outweigh any benefits. Some opponents of fiscal policy believe that the federal gov-
ernment should limit itself to monetary policy, which we will discuss shortly. Others believe
that it is best for the government to do nothing at all.2009–2013: The Eclipse of Fiscal Policy. It is worth noting that most voters have
neither understood nor accepted Keynesian economics. Despite popular attitudes, politi-
cians of both parties accepted Keynesian ideas for many years. Democratic president John
F. Kennedy was perhaps the first Keynesian in the White House. Republican president
Richard Nixon (1969–1974) is alleged to have said, “We are all Keynesians now.” Even
George W. Bush justified many of his policies using Keynesian language. During the first
years of Obama’s presidency, however, Keynesian thinking among Republicans in Congress
vanished almost completely. Some members adopted the ideas of anti-Keynesian econo-
mists. The majority simply rejected countercyclical spending, reflecting the popular belief
that during a recession the government should “tighten its belt.”
It did not help the Keynesian cause that Obama’s enormous stimulus package failed
to end high rates of unemployment—Keynesian economists argued that the stimulus was
less than half of what was needed to accomplish such a goal. When Obama, in his 2010
State of the Union address, employed the belt-tightening metaphor, Keynesians realized
that they had lost control of the political discourse.
The unemployment rate remained close to 9 percent through 2011, a figure that tradi-
tionally would have ruled out short-term efforts to reduce the deficit. Still, Obama and the
Republicans in the House issued competing budget plans that called for cuts in government
spending. As you read in the At Issue feature in Chapter 11, one consequence was a series of
crises resulting in spending cuts and tax increases. These changes in the direction of “auster-
ity,” together with slow-but-sure economic recovery, reduced the deficit by 2013. Keynesians
blamed the austerity for the slow pace of economic recovery. Republicans argued that the
slow pace was due to factors such as business uncertainty over the effects of Obamacare.Deficit spending and the Public Debt
The government typically borrows by selling U.S. Treasury bills, notes, and bonds, known
collectively as Treasury securities and informally as treasuries. The sale of these federal obli-
gations to corporations, private individuals, pension plans, foreign governments, foreign busi-
nesses, and foreign individuals adds to this nation’s public debt, or national debt. In the
last few years, foreign governments, especially those of China and Japan, have come to own
about 50 percent of the U.S. public debt. Thirty years ago, the share of the U.S. public debtwww
Helpful Web Sites
For economic policy
arguments based on a
rejection of Keynesianism,
check out The Heritage
Foundation by searching
on “heritage issues
economy.”
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