Posts Tagged ‘Keynesianism’

The Death of Keynesianism?

Saturday, November 13th, 2010

Here’s Peter Beinart’s Post Election piece. Aside from the contentious bit about “American Exceptionalism,” (which is a separate topic worth returning to later),  the larger issue is where the economy has been and where we go from here. Beinart argues that the biggest casualty of this election is not Democrats, but Keynesianism, the economic theory that argues that when the economy is in recession, the government needs to pump money into the system in order to pick up the slack. While Keynesianism holds that the most effective way to do this is through government spending, temporary tax cuts are also considered stimulative. The idea here is that during times of recession, the private sector stops investing so even if the government lowers taxes, the additional income is likely to be saved or used to pay off debts, not invested into the economy.

Ironically, the discrediting of Keynesianism comes at a time when we have just seen its success. As much as the stimulus was maligned by the Republicans, independent experts such as John McCain’s top economic advisor have argued that it was an integral part of the successful government efforts to avert a Great Depression 2.0. Mark Zandy writes in a report earlier this year that without the massive government intervention by the Treasury Department, Congress and the Federal Reserve (AKA–Lower Interest Rates, TARP and the Stimulus–AKA everything the Tea Party was against), GDP in 2010 would have been 11.5% lower, there would have been 8.5 million less jobs and the country would have been experiencing deflation. While much of this change can be attributed to TARP and the Fed’s actions, Zandy estimates that in 2010 GDP is 3.5% higher, unemployment is 1.5% lower and there are 2.7 million more people employed due to the stimulus.

I’m not arguing that the stimulus was perfect, that there wasn’t waste, or that it couldn’t have been more effective if it was designed differently, but I am arguing that it was effective and that the Republican alternative of just tax cuts and monetary policy would have created the same giant deficit, and produced less economic growth, because despite the lowest US tax rates in 50 years, no one was creating jobs or expanding their busineses in 2009 and interest rates were already at close to zero.

Why Obama wasn’t waving this report around on the campaign trail is a mystery to me, but it is difficult to base a campaign on:  ”you think things are bad now, just think of how bad they would have been…” Also, while government intervention did prevent a Great Depression, job creation has stalled this year as private industry (which is actually doing quite well) has been content to sit on large cash reserves instead of hiring new employees or expanding their businesses.

It has become an article of faith among Republicans that Health Care Reform, Financial Reform and the prospect of capping carbon emissions has created a climate of uncertainty that has decreased investment. This argument probably has some merit, but I think it’s overblown. You can complain about a 2000 page Health Care Bill, but health care costs increased over 100% in the last decade. The heath care status quo was inherently uncertain and remains so. Similarly, we could have quibbles over how much regulation of the financial industry is necessary, but again, anyone who watched as Wall Street crashed this economy should have trouble arguing that reforming the banking industry wasn’t needed. In fact, it’s clear that Obama, Geithner and the Banking Committees in Congress engaged in a deliberate strategy of minimizing the impact of financial regulation on the existing system (yet another eggregious example of how much special interest control our government).  

A good case can be made that, while the stimulus and other government intervention succeeded in creating a floor for the economy, the current stall in the recovery highlights the fact that there should have been more incentives for private sector hiring. In retrospect, the stimulus should have included tax cuts that were specifially targeted to job creation, like a payroll tax, instead of the $500-$1000 tax cuts that were given to 98% of Americans. Those tax cuts fulfilled an Obama campaign promise, but probably did little to stimulate the economy.    

Republicans, for their part, were either incapable of telling the difference between short term stimulus and long term deficit spending, or they did a great job pretending that they couldn’t tell the difference (I honestly am not sure which). For their obstructionism and unwillingness to help rescue the economy in any way, they reaped the rewards in this election. Democrats also played right into their hands, by not making any credible moves to cut the deficit in the long term, and in fact, using Medicare cuts that should have been used to balance the budget, to fund Health Care Reform.

Just to give a sense of the hole we find ourselves in, here is a report on the jobs created in October. This number was a positive surprise, since 150,000 jobs created in the month was higher than expected and it comes on the heels of 4 months of net job loss (due to lost government jobs), but the increase was not enough to move the unemployment rate. The article points out that

even if the economy suddenly expands and starts adding 208,000 jobs a month — as it did in its best year this decade — it would still take 12 years to close the gap between the growing number of American workers and the total available jobs.

So Beinart’s frustration is not misplaced. Despite the money that was spent on the stimulus, our infrastructure is still in major need of upgrade and a targeted effort to invest in American infrastructure could stimulate significant private sector job growth.  As China and India industrialize and reorient their economy for the 21st Century with investments in green technology, our infrastructure is crumbling and our politicians are so immobilized by partisan politics that they can’t agree on a plan to decrease our dependence on foreign energy, despite the fact that everyone knows how important this is for the country. 

Republican control of the 2/5 of the Senate has stopped this kind of investment in America and the midterm election results make them even less likely. We have officially entered an era of retrenchment, where the question is not how should we stimulate the economy, but how should we balance the budget. While the economic pain continues for the country, all options to stimulate the economy (including tax cuts) have effectively been taken off the table. In the coming weeks, Democrats and Republicans will argue about whether to keep the Bush Tax Cuts or let them expire. But even this debate is only about whether to take the foot off the pedal, not a new strategy for how to accelerate.

But don’t worry Republicans. now that your guys are calling shots in Congress, I’m sure that the Democrats will give Boehner and the Republicans as long as they gave Obama to start creating jobs.

How does next week sound?