Searching for Keynes: With Application to Canada, 1870-2000

Abstract

Keynes' idea (1936) that governments can stabilize aggregate activity is one of the most important innovations in public policy thinking in the twentieth century. However, the extent to which Keynesian theory has actually influenced policy actions remains an open question. We reconsider the elements required to address that question and then conduct our own 'search for Keynes'. To do so, we develop an intertemporal probabilistic voting model of fiscal structure in order to distinguish empirically between transitory and permanent components of fiscal structure - where Keynesianism concerns the transitory elements - and to construct a counterfactual showing what would have happened to transitory policy 'after Keynes', had pre-Keynesian stabilization continued. Democratic governments have always been concerned with alleviating the hardship of voters in bad times and this must be accounted for in assessing the impact, if any, of the Keynesian revolution. Together, these and other steps take us on a fascinating tour through the methodology and substance of fiscal history. While the model could be adapted to study the fiscal structure of any competitive political system, we look for evidence of attempts at Keynesian stabilization in the policy actions of the Canadian government after 1945. The study uses consistent budgetary data for 1870 to 2000 constructed by Irwin Gillespie (1991) and updated by the authors. The Canadian case is of particular interest for a number of reasons. The White Paper on Employment and Income in 1945 signalled the acceptance of Keynesian ideas in senior policy circles and R.B. Bryce, one of Keynes' early students (who considers 1939 as the date of the first Keynesian budget in Canada), played an important role for many years in the Department of Finance.

Keywords: Keynesianism, liqidity constraints, the welfare state, permanent versus transitory government policy, political equilibrium, probabilistic voting

JEL Classification: D72, D78, E12, E62, H30, H60