The Keynesian ratchet

Note that we say ratchet, although racket is also a useful description.

Approximately 700,000 Americans will soon lose their benefits as the government tightens the regulations around stable work requirements for recipients, stretching the already scarce resources of the communities that Waide’s operation helps.

Those communities are often African American, raising the prospect that Trump’s move will put extra stress on minority families. Approximately one in three households using Snap benefits are African American. In general, African American households are more likely to experience food insecurity, according to the Center on Budget and Policy Priorities. In 2016, Snap helped more than 13 million African American households put food on the table, according to data from the US agriculture department’s fiscal year 2016 Snap Households Characteristic data.

Snap is food stamps, one of the major pieces of US spending upon - or for the benefit of perhaps - the poor.

One observation is that if it is black Americans who will lose most from this reduction in the program then it must be black Americans who gain most from it at present. Given the social background in the US insisting that welfare aids blacks most might not be the wisest political idea ever.

But that’s not our point here - nor is whether the current, past or future levels of Snap are correct in the overall sense. Rather, that ratchet.

For Snap eligibility was greatly expanded in those dark economic days of the first Obama Administration. We can argue that that was the correct economic response too, in that Keynesian manner. Increase the deficit, get money into the hands of the people who will spend it, thereby boosting the economy. We could even call it a version of Milton Friedman’s helicopter money.

OK. But implicit in that justification is that when the dark days have gone - possibly when there’s no longer an Obama Administration - then that stimulation of the economy should cease. But note what happens when this is suggested. Instead of a general agreement that we’re finished now with Keynesian stimulus we have the shouting that we’re stealing crusts from starveling babies.

That’s the Keynesian ratchet. Even if it is true that there should be deficit paid for stimulus the justification for the increased spending changes when it becomes time to reduce it again. So that the spending never is - or never should be - reduced in those better economic times.

All of which is rather why we agree with the later Keynes himself. Assume, again, that the stimulus should happen - we’re not sure we do agree with this but make that assumption. It should be done by cutting taxation, not increasing spending. Again as Keynes suggested, by cutting social security (national insurance for the UK) taxes. The benefit of this being that the clamour to revive state revenues, when the crisis is past, will be rather greater than that to reduce state spending.

That is, pro-poor tax cuts in recession will alleviate the problem without becoming a permanent part of the economic settlement. We abolish the ratchet.

Of course, we’re pro-pro-poor tax cuts all the time anyway but that’s a rather more structural matter.