Obama has a plan! What would Lord Keynes say?

According to this Politico report from America's Heartland, President Obama will unveil a new plan to increase jobs and reduce the deficit that is "not a rehash of plans he has pitched for many weeks." Of course, he'll need a couple weeks to work out the kinks, so he's decided to announce it at the beginning of September.

Let's set aside the fact that most people have been wondering where this plan has been for the last two and a half years, and see what's really in it. We already know a little bit about it, as this Weekly Standard article notes. It includes the development of a private-public infrastructure bank (Keynesianism), tax hikes on the wealthy (is there ANY economist that thinks this is a good idea?), and patent reform (what?).

So we've got some warmed-over Keynes, a small-ball patent reform, and tax hikes on the wealthy. First off, let's give Keynes just a little bit of credit (intellectually). One reason the first stimulus didn't work was that it was always a handout to government unions and privileged groups who the President wanted to thank for his successful election. Not even Lord Keynes would have said it was a very effective economic (or political) strategy. He also would have bristled at the notion of tax hikes on corporations and wealthy individuals, at least with the economy in this state. Nevertheless, this new bank is straight out of any Keynesian textbook. It may be new, but innovative it is most definitely not.

The other problem is that Keynes never anticipated, and would indeed have been horrified by, the shocking levels of structural, long-term debt the the US has amassed in the form of entitlement programs. Keynes, for all that can be said against him, honestly believed that he was writing with an eye to saving capitalism. However, if we are to save capitalism these days, we need to know what the markets "feel." It may be that there are animal spirits, and the turn to a more psychological focus on how people react to market developments may be very helpful. But if Americans know the plan, but don't believe it, any multiplier will be gone. Moreover, the US still must focus on the long-term problems; Keynes never anticipated the idea of entitlement debt being almost 100%. He had seen the destruction of Europe, but never conceived that nations could run such debts for so long.

One of the biggest problems with Keynesian economics, therefore, is that Americans have moved beyond it both in theory, but also psychologically. If no one knows (or cares) that the government is running a deficit, deficit spending in a time of recession may work. The problem is that too many of the people who will end up paying for that spending tomorrow are nowadays saying to themselves, "well, we won't get fooled again!" If there was ever a multiplier, it evaporates with the knowledge that confiscatory tax policy will emerge in the future to compensate for deficit spending today. As a result, the animal spirits have crouched into survival-hibernation, rather than taking advantage of the sugar buzz.