What is the American model really about?: Soft budgets and the Keynesian Devolution

Abstract

High employment in America stems not from flexible wages, but from institutions that foster high effective demand, especially in health care, higher education, housing, and the spending of retirees. These institutions combine public and private revenue sources so as to establish soft budget constraints; the net effect is to displace deficit spending from the public to the private sector—a Keynesian Devolution that in the late 1990s drove demand to full employment levels even though public deficits disappeared.