Goodbye Keynes, Hello Hoover- William Grieder

The first fundamental failure of Keynesian economics occurred forty years ago during the Vietnam War when the economy was overheating but the political system failed to take the corrective steps that would restrain price inflation—that is, raise taxes and reduce federal spending. The decade of economic stagnation that followed became a central factor in discrediting both liberalism and the Democratic Party.

We are now witnessing a second great failure of the doctrine John Maynard Keynes devised for managing a healthy economy. This time, Washington faces the opposite problem—a starkly underperforming economy in which 10 percent of the workforce are without jobs and income. Yet the President and Democratic Congress, spooked by the swollen federal deficits, are unwilling to do what Keynes prescribed in these circumstances—pump up federal spending enormously and run even larger budget deficits in order to force-feed a stronger recovery.

The results of this political decision will be tragic for millions of struggling families, but also potentially devastating for the Democratic party. Democrats are implicitly choosing to do nothing more to rescue the country from the deepening dislocations and lost output. Making mistakes can be forgiven, but not giving up.

The president and his lieutenants have evidently decided they have already done enough. Indeed, they keep reminding us they saved the country from something worse. Millions withhold their congratulations, since something worse is what they are now experiencing. The losses will last longer and multiply more widely so long as Washington declines to act more forcefully. Americans who never heard of Keynes will make their own judgments about whom to blame.

This represents a failure of politics, not of the Keynesian logic. But the distinction hardly matters to ordinary folks. If the political system can never find the stomach to deliver the hard medicine that Keynes prescribes, what good is the doctrine for governing? The political order failed Keynes on the upside in the sixties—unwilling to restrain an over-stimulated economy. Now politicians are failing Keynes on downside—declining to force-feed the injured economy when it desperately needs government’s help.

Years ago, the late John Kenneth Galbraith explained why politicians did not act against incipient inflation back in the late sixties when Lyndon Johnson was president. "An increase in taxes at a time when prices are rising appears to all but the most enlightened citizens as a peculiarly gratuitous action," Galbraith wrote. "‘More is being paid for goods: now the government adds insult to injury with higher taxes."

This time, Barack Obama will not have good excuses. If the economy slips back into recession or simply stagnates for many years, forfeiting potential production, jobs and incomes, the president will rightly be the goat. Deficits are the cure, not the disease, as many of us have been writing for months. It’s true the red ink upsets people who cluck and express alarm. But no political party ever lost a national election on the deficit issue. Ronald Reagan’s feel-good deficits made the opposite point.

Obama’s governing problem is that he tries to have it both ways. His presidency started with stimulus spending, but far short of what even some of his own economists said would be needed. Then the president swiftly took up the other side of the argument and joined the chorus of deficit hawks, bemoaning the red ink and promising to do something about it (like maybe by cutting Social Security?).

Obama, instead of making the case for continuing stimulus with clarity and conviction, sends cloudy mixed signals. The White House makes cozy with Blue Dog Democrats and right-wing Republicans. The president refused to give strong instructions to Congress and, not surprisingly, nervous members of Congress took this as permission for them to duck too. The net effect will be emasculated stimulus legislation, too trivial to do much of anything for the economy.

Obama’s economic strategy turns out to be closer to Herbert Hoover's than to Franklin Roosevelt's. You cannot really tell from presidential speeches whether he adheres to Keynes or the "old-time religion" preached by balanced-budget conservatives. Maybe that could change if the economic numbers suddenly turn negative, but it is already too little, too late. The president looks to be under the influence of stale bromides—the thinkers Keynes once derided as "defunct economists."

William Greider

The Nation.

We need jobs, not budget cuts

In order to help the economy grow, national, state and local governments need to maintain and to create jobs.  This policy is called Keynesianism.   Interestingly candidate Meg Whitman proposes exactly the opposite – cut jobs and reduce taxes for the corporations.   That is Reaganomics.

County revenues and state revenues are down. There has been a  nearly 30 percent drop in sales tax for Sacramento County over the past five years. Property tax funds an  large  share of county budgets, and plummeting real estate values have meant even less income for counties to pay their bills.  State cutbacks have been severe cutting some 16 billion from schools in the last two years.

 The reality is that almost all of California's counties are facing significant budget shortfalls resulting in cuts in programs, services and staffing.  And, some 42 of the states have severe budget crises.

 California and other states  have budget restrictions that prevent deficit spending, yet, according to Keynesian theory  we need deficit spending to get out of this recession.  The cutbacks at the state and local levels around the country are negating the value of the federal stimulus of 2009.  We must  stop the cutbacks at the state and local level.

Paul Krugman,  won the Nobel Prize in Economics in 2008 and is well known for his regular columns  in the New York Times.  He has republished The Return of Depression Economics with an update- the Crisis of 2008.  Krugman, a Professor at Princeton,   argues that the crisis is endemic.  It has been growing since the 1990’s.  He describes  particularly the 1994 Peso Crisis in Mexico , the East Asian Crisis, and the  US stock market bubble of 2001/02.  He could have well added the Russian Crisis of 1998.

The 2007/2009  U.S. economic  crisis was severe in part because of the   growth of finance capital as a  dominant actor  in our economy .   Finance was in crisis, not the production of goods and services.  Since the 1980’s,  in the age of globalization,  U.S. finance capital and financial services grew as a percent of the total profits in the economy  while manufacturing  declined.  At the same time, while the financiers made billions from stock options and bonuses, the average wage of working families remained stagnant, thus they had limited  money to use to buy new products.  And, when they did buy, the products were often manufactured in China or Vietnam and their production stimulated  those economies, not the US economy.

Krugman argues for  a return to Keynesian understanding of this crisis in developing a response to the current loss of  jobs and thus loss of demand.   That is, the government must stimulate economic recovery by investing in jobs and infrastructure  even though  the increased globalization  of the economy makes a national Keynesian  response less effective.   In  the New York Times Krugman  frequently  argues that the stimulus of 2009  was too timid to jump start the economy .   Since the government has not  provided  a major economic  stimulus,  because of Republican opposition in the Senate,  we are suffering  a sustained  crisis as state and local governments  cut  public services and lay  off public workers. Unless there is  significant public investment and  changes in policies and financial regulations, the crisis will repeat again and again.

The deep, agonizing, unpopular cuts being imposed on states and local communities, including  lay offs of sheriffs, teachers, health care workers, child protective services, and the loss of the services which they provided make matters worse, not better.  Neither the government, nor the legislature  caused these cuts, they were created by the grand theft on Wall Street. Major banks and corporations looted the economy creating an international meltdown.  Now, they have been rewarded with bail out money.  The crisis was not caused by students, teachers, public employees  nor recipients of social security.   The major bankers, finance capitalists in the U.S. robbed the banks and the federal treasury in 2008/2009.  They took hundreds of billions of dollars out of the economy.

  This crisis ,caused by the greed and avarice of the financial class and aided by the politicians of both major political parties,  has forced the cutting of  higher education, of k-12 education, and of welfare systems.

We  need  a federal stimulus to create jobs to overcome the cut backs of the finance capital robbery.    For a start,  the federal government should provide funds to hire teachers and  police officers.  They should fund a major portion of Medicaid. Such funding would provide the states with financial flexibility to fund other necessary programs such as services to the blind, the disabled, the elderly.

The prior federal stimulus  of 2009 ARRA  was too small.  The Senators kept the stimulus small to gain the needed 3 Republican votes to pass the bill in the face of a potential filibuster.  A  new stimulus should not  bail out  Wall Street and the banks, but should be an investment to create and protect jobs.   WE need a Keynesian stimulus.  When governments create jobs   workers pay taxes.  Taxes fund further economic growth.  The most direct way to deal with the current budget deficit is to grow the economy, not to cut workers and programs.

 And we  must regulate the banks.  Wall Street should not be allowed to rule and to ruin our country – again as they did in 2007-2009.    We need some return to the Glass Steagal system of separating banking from the gambling of investment houses and hedge funds.  The current financial reform legislation does not contain a return to the Glass Steagal restrictions.

To achieve this stimulus we need to  return some democracy to our political system.  It is out of balance.   There is far too much power in the hands of an oligarchy.