8th Market Economy Colloquium: “Persistent Deficit Spending Even Keynes Would Have Opposed”

8th Market Economy Colloquium

Date and Time: 11:00 a.m., September 12, 2025

Venue: Pureun Hall

Topic: “Persistent Deficit-Financed Fiscal Policy” That Even Keynes Would Have Opposed

Presenter: Yiseok Kim, President of the Market Economy System Research Institute

Discussants: Jaewook Ahn, Chairman of the Center for Free Enterprise (CFE); Sung-no Choi, President of the Center for Free Enterprise (CFE); Gwang yong Go, Policy Director of the Center for Free Enterprise (CFE); and three others

“Persistent Deficit-Financed Fiscal Policy” That Even Keynes Would Have Opposed

Yiseok Kim, President of the Market Economy System Research Institute

As the Lee Jae-myung administration has come forward with an expansionary fiscal policy that is even more aggressive than that of the Moon Jae-in administration, accepting substantially larger fiscal deficits, economists who fully recognize the problems inherent in such policies cannot help but once again point them out. Some discuss the dangers of expansionary fiscal policy mainly in terms of how worsening fiscal soundness may affect a country’s sovereign credibility, but more fundamentally, we need to examine how such expansionary fiscal policy is connected to the balance among savings, investment, and consumption, as well as to issues of inflation and unemployment.

In other words, this issue ultimately leads us back to the old debate involving Keynesians versus the Austrian and Chicago schools over monetary theory and business cycle theory.

Keynes argued that during a recession, governments should seek recovery in the short term through deficit financing, but economists should carefully review the criticisms raised by Mises, Hayek, Friedman, and countless other scholars and properly clarify for the public who was right.

The fundamental problems of Keynesian economics have already been well identified both in Korea and abroad.

I cannot repeat all those theoretical examinations here, but while pointing out the long-term consequences of Keynesianism, I would like to address a recent interesting claim—namely, John Taylor’s (Hoover Institution) argument that although Keynes proposed short-term expansionary fiscal policy, he opposed “persistent” fiscal deficit policies.

Looking at the long-term consequences of Keynesian policy that are often pointed out, one can first cite inflation caused by excessive money creation and low growth resulting from unproductive investment. In the case of the United States, from 2020 to 2022 the U.S. government injected more than $5 trillion in fiscal stimulus into the economy, while the Federal Reserve lowered interest rates to zero and purchased assets, which led to a sharp rise in inflation. By intentionally increasing consumption spending to stimulate aggregate demand in the immediate term and artificially lowering market interest rates, such policy induces so-called mal-investment and current consumption, and rather than growing the economy, it can instead push it into a mire of stagnation.

Moreover, even as fiscal deficits continue in the United States and many other countries, continued reliance on deficit-financed fiscal policy has led to warnings that national debt is expanding to “unsustainable” levels. In the United States, interest payments on outstanding government debt have now reached a level exceeding defense spending, to the point where it is said that the country may no longer be able to maintain its status as a hegemonic power.

In Korea as well, interest payments on government bonds are expected soon to reach 60% of defense spending.

In the end, persistent inflation and the accumulation of government debt are the inevitable result of claims that the economy can be revived simply by pouring in fiscal “priming water,” that is, through stimulus-driven activation of the economy. Yet although it is widely understood that continuing deficit-financed fiscal policy even as deficits accumulate originated in Keynes’s ideas, Keynes’s original position, it is said, was that during an economic downturn the government should fill a shortfall in demand through borrowing or spending, but only temporarily, and that once the economy recovered, the debt incurred should be repaid.

In fact, it seems that the Korean public also senses that deficit-financed fiscal policy brings about asset inflation. Perhaps because they experienced a sharp surge in real estate prices during the Moon Jae-in administration, housing prices in Seoul started to stir again as soon as another left-wing government came to power.

Interestingly, in his early work The Economic Consequences of the Peace (1919), Keynes strongly criticized the government’s expansion of spending or indiscriminate issuance of money during inflationary periods—that is, during booms or postwar overheating. He is even said to have remarked that when a government cannot secure resources through borrowing or taxation and instead prints banknotes to make up the difference, it causes inflation, which is “the most subtle method of overturning the existing basis of society.” That is almost the sort of statement one might expect from Mises.

In 1936, Keynes wrote The General Theory of Employment, Interest and Money, in which he argued that during recessions governments should stimulate demand by expanding fiscal spending. However, the claim is that he advocated this only in the context of a counter-cyclical fiscal policy—that is, as a response running opposite to recession or overheating—and that after recovery, spending should be reduced and taxes increased to restore fiscal balance. It is also said that in a letter Keynes sent to James Meade in 1943, seven years after the publication of The General Theory, he criticized policies dependent on short-term fluctuations in consumer spending.

If so, why did Keynes, as John Taylor argues, advocate in The General Theory short-term policies that would produce long-term results he himself did not want? It may be that he did not sufficiently understand the “democratic” political process in which deficit-financed fiscal policy would become preferred, or perhaps he simply had a confused theoretical system. In fact, during his debate with Hayek, when Hayek criticized Keynes’s theoretical system for lacking a theory of capital, Keynes reportedly did not confront the point directly but instead brushed it aside by saying that his German was poor and that he therefore did not know the theory well. As a result, the debate between the two never truly took shape, and amid the fad of the so-called “Keynesian macroeconomic revolution,” Hayek ended up suffering what amounted to a default defeat.

Determining which inference is most plausible would require further in-depth research, but to add one conjecture here: perhaps Keynes, by overemphasizing the “uncertainty” that makes it impossible to know what future consumption current savings will concretely become, placed no trust at all in the market’s autonomous adjustment function, and therefore argued that the government should seek recovery by stimulating aggregate demand even through deficit-financed fiscal policy. Because Keynes mistakenly saw the “link between saving and consumption” in the market as completely broken, perhaps he ended up proposing short-term deficit-financed fiscal policy that would produce the very long-term results he himself opposed. In reality, in the market the future and the present are connected in the time market through the price known as the interest rate.

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Original title: 제8회: 케인즈도 반대했을 것이라는 “지속적인 적자 재정정책”

Author: Market Economy Colloquium

Date: 2025-09-12

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=collo&pn=1&idx=28070