Debt

True Keynesians: We Must Spew Out Lukewarm Keynesians

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All makers of contemporary economic policy are slaves of the defunct economist John Maynard Keynes. Now their manifest failure has forced them to take drastic measures that include everything except admitting that the Keynesian consensus is wrong. 

Admittedly, Keynes is the one you want to party with.

I and a handful of fellow deviants spend a lot of time documenting how mainstream economic discussion is set up to exclude pro-savings arguments, doubts about the wisdom of deficit spending, critiques of the blind pursuit of low interest rates, and other heresies. 

To give just one recent, silly example, here's a discussion of the Obama Administration's effort to "rescue" the economy, in which neither CNN's Candy Crowley nor lame-duck chairman of the Council of Economic Advisers Austan Goolsbee can be bothered to ask what any owner of a private business would have had to think about right up front: Is it possible that the money we're spending is just going to waste? 

Counting up all the rescue packages of the Bush and Obama Administrations and two rounds of quantitative easing, the United States has now spent about $2 trillion in bailouts and created $2.9 trillion in new money, yet most economic indicators are lower than they would have been according to the worst-case scenarios that were made public when those spending decisions were approved. 

A failure of that magnitude needs some heavy PR management. Last year I documented early instances of the "true Catholic" argument: Keynesians claiming that today's Keynesians are not being true to Keynes (who would have made a bigger or smarter stimulus or some such thing). 

Several times since then I have invited advocates of intervention to name a dollar figure they would consider sufficiently stimulative. I've even thrown out a number: $5 trillion to $8 trillion, which would match the decline in household net worth and arguably replace the effects of the "demand-side shock." I didn't imagine Paul Krugman had me on speed-dial, but it's notable that nobody has accepted that challenge. 

The "true Keynesian" argument continues to stink up the public discourse, however. Most recently is this ALDaily.com-recommended jeremiad against the Obama administration's "false Keyensians" by James K. Galbraith, the confusingly named son of the famous defunct economist John K. Galbraith. For better or worse, here's the state of the art in contemporary Keynesian denial: 

And so the False Keynesians went home—Romer back to Berkeley, Summers to Harvard. The reputation of Keynesianism is just part of their collateral damage.

After the midterm elections, all attention turned to the victors' agenda: the federal budget deficit, the public debt, spending cuts, and the cause of "entitlement reform"—our Orwellian phrase for slashing Social Security and Medicare. How can we understand this march of budget-cutters and free-market fundamentalists? Where do their ideas come from? Unlike the Reagan revolutionaries of 30 years ago, they have no academic messiah, no newspaper apostles, and, so far as one can tell, no sacred text. "Monetarism" plays no role, nor does "supply-side economics." They are not really "Austrians," though some claim as much. 

There's a lot I can't exactly respond to because of the 1990s-freestylin' nature of Galbraith's writing. I had to reread several passages to figure out whether Galbraith was parodying somebody else's ideas, doing an unironic LaRouchian rant against marginal utility, or something else. Galbraith writes that something is "redolent of the Social Darwinists' view of the divine right of the rich to rule," which is several platitudes too far. Darwinism doesn't argue for a "divine right" to anything. Galbraith may be thinking of believers in natural aristocracy or something like that, but in practice he's just mixing phrases in a sloppy way. His dead writing also includes vague technothriller blurbs…

In 2009 we realized it. But our computers, and the technicians who ran them, overruled us.

…and phrases that aren't so much non sequiturs as anti-sequiturs: 

And if Keynes were in charge, then the captains of industry could not be.

But Galbraith also makes claims that are relatively straightforward and thus easily refuted: 

In [business lobbyists'] version of the story, interference by government is a choke-leash on the animal forces of free-market dynamism.

If you can't remember any business lobbyist claiming anything about unleashing "animal" energies, that's because this is a notion that originated with Keynes himself. (To get a sense of where Galbraith stands on the regulatory-capture question, consider that he holds up corporate welfare queen Jeffrey Immelt as a specimen of free-market fanaticism.) 

Galbraith is equally sloppy in delineating schools of thought among the people he attacks: 

Ben Bernanke and Christina Romer, both of whom had reputations as experts on the Great Depression, were closer to Milton Friedman's view of that matter—that the Fed did it—than to Keynes.

This is partly true with regard to Romer, whose academic work made the argument for monetary stimulus as effective and fiscal stimulus as ineffective. However, again as we have pointed out, Romer became a vocal advocate of fiscal stimulus while running the CEA, even going so far as to posit an impossibly precise multiplier of $1.55 for every federal dollar spent. 

Bernanke's view of Depression-era monetary policy, however, is markedly different from Friedman's. As I discussed the other day, the two views split on the question of whether bank failures in the thirties should be seen primarily as liquidity problems or solvency problems. It's an interesting question. I believe a clever economist might be able to take this comparison of Bernanke's and Friedman's views and argue that of the two, Friedman had a more "pure" Keynesian read. I don't know whether Galbraith is a clever economist, but by lazily conflating the two, he just ends up wrong. 

Maybe I'm setting too high a bar of accuracy for what is really intended as a rant. But facts matter even when you're ranting: 

Meanwhile, in the halls of Congress, as well as at Westminster and in Frankfurt and Brussels and Berlin, the ghosts of Smith and Ricardo mutter on about unproductive government and how savings create investment. So they cut and cut, and when that doesn't work they call for more cuts. 

What has been cut? Federal spending is higher this year than it was in 2010. It was higher in 2010 than it was in 2009, higher in 2009 than in 2008, and so on. More to the point, we don't have a budget. The United States has not had a signed budget in more than a year, so in fact there is not a single line item anybody can point to as having been reduced or eliminated. If we were spending less, why would we need to keep raising the debt ceiling? 

The K stands for "kissable."

This is what is so terrifying about the practical failure of the Keynesian consensus: The fish don't feel the water. We barely even have the language to point out the reasons for the failure, let alone to suggest that some truth might be found outside the consensus. 

I don't expect or receive any quarter when I try to point out that an economy where you can't pay an employee whatever the two of you agree to, charge whatever interest rate you can get a borrower to pay, or relocate an airplane plant without getting the government's permission is not a true free market. So I shed no tears for Keynesian fundamentalism. No doubt there are soi-disant Keynesians out there who have lost the Master's true message, just as there are followers of Jack Chick and L. Ron Hubbard who misinterpret their respective leaders' teachings. That's tough luck. I'm just glad to see the economic quacks are starting to fight among themselves.