The Rebirth of Keynes, and the Debate to Come

The economy has just about come to a standstill – not so much because credit markets are clogged as because there’s not enough demand in the economy to keep it going. Consumer spending has fallen off a cliff. Investment is drying up. And exports are dropping because the recession has now spread around the world.

So are we about to return to Keynesianism? Hopefully. Government is the spender of last resort, which means the new Obama administration should probably be considering a stimulus package in the range of $600 billion, roughly 4 percent of national product — focused on building and repairing the nation’s crumbling infrastructure, providing help to states to maintain services, and investing in new green technologies in order to wean the nation off oil.

But between now and late January, when the stimulus package will be voted on, we’re likely to be treated to a great debate over the wisdom of Keynesianism. Fiscal hawks will claim government is already spending way too much. Even without the stimulus package, next year’s budget deficit is likely to be in the range of $1.5 trillion, considering the shrinking economy and what’s being spent bailing out Wall Street. The hawks also worry that post-war baby boomers are only a few years away from retirement, meaning that the costs of Social Security and Medicare will balloon.

What the hawks don’t get is what John Maynard Keynes understood: when the economy has as much underutilized capacity as we have now, and are likely to have more of in 2009 and 2010 (in all likelihood, over 8 percent of our workforce unemployed, 13 percent underemployed, millions of houses empty, factories idled, and office space unused), government spending that pushes the economy to fuller capacity will of itself shrink future deficits.

Conservative supply-siders, meanwhile, will call for income-tax cuts rather than government spending, claiming that people with more money in their pockets will get the economy moving again more readily than can government. They’re wrong, too. Income-tax cuts go mainly to upper-income people, and they tend to save rather than spend.

Even if a rebate could be fashioned for the middle class, it wouldn’t do much good because, as we saw from the last set of rebate checks, people tend to use extra cash to pay off debts rather than buy goods and services. Besides, individual purchases wouldn’t generate nearly as many American jobs as government spending on infrastructure, social services, and green technologies, because so much of we as individuals buy comes from abroad.

So the government has to spend big time. The real challenge will be for government to spend it wisely — avoiding special-interest pleadings and pork projects such as bridges to nowhere. We’ll need a true capital budget that lays out the nation’s priorities rather than the priorities of powerful Washington lobbies. How exactly to achieve this? That’s the debate we should be having between now and January 20 or 21st.

Originally published at Robert Reich’s weblog and reproduced here with the author’s permission.

7 Responses to "The Rebirth of Keynes, and the Debate to Come"

  1. Stormy   November 29, 2008 at 7:25 pm

    Neither tax cuts nor government spending–unless either are intelligently targeted–will work. The problem is the massive trade deficit, imports-export ratio now 2 to 1.Both sides of the above coin are wrong-headed ways to stimulate the economy, i.e., to address the core problem: We import way too much and export far too little.Solution? target either one–or both–to improve exports. Even this action will take time, with the world economy in deflationary crisis.But, doing the other two will merely exascerbate the problem.Not to be personal here, but your framing the debate as you do does not help the us see the core problem.Time for new solutions.Take a serious look at our net trade from 1960 to 2007. Then tell me what you are going to do.Or read my pieces on angrybear.blogspot.comTwo of them: Volcker: “Does Trade Matter? The Old Guy says, ‘Yes'”and “Trade and GDP”

  2. Guest   November 29, 2008 at 7:55 pm

    Only a rights-based solution will increase economic activity. Just read my book, The Eminent Domain Revolt.That’s what I told this little squirt, but he’s 110% corrupt. You should see this little monster trotting around Berkeley, this economic Michael Dunn. Loathesome.Lovingly,John Ryskamp

  3. NancyinSTL   November 29, 2008 at 9:49 pm

    This isn’t limited to which economic school one espouses. It’s a basic set of equations for societal well-being.The problems as I see them are that:1) We have squandered our production capacity by outsourcing to cheaper sources.This means that the middle class will no longer be a driver of consumption because they will not have the income to support it. The current portion of our GDP can no longer rely upon 70% consumption. The upper class, which can afford upscale “stuff”, can’t possibly consume enough to make up the difference.2) We are entering into profound climate change and energy availability issues that will affect all aspects of our lives.What has worked in the past, such as higher energy input, will no longer produce more “stuff”, which may or may not be necessary to our lives.The energy input will be curtailed as resources to maintain the use of fertilizer to increase crop production and fuels to farm large fields (as in square miles, as opposed to hundreds of acres).Diminished labor requirements because we are outsourcing production to countries with lower wages/benefits and/or machines/robotics which can produce the goods more efficiently. In either case, it reduces the number of gainfully employed people who would have the resources to purchase goods and services.Consumption can not be the be all/end all goal of society without adequate compensation and resources to provide for basic needs (food, water, heating/cooling capacity and shelter. The imbalance will adjust, but our policy will define our future society.

  4. ChuckD   November 30, 2008 at 6:33 am

    If government spending were “good for the economy”, would there ever be a bad time to do it? If there were no cost to the “stimulus”, we could do it all the time. But the other side of countercyclical funding of government is the need to accumulate the resources (taxes) during good times (which makes them not so good), so they can be spent during the bad times (which makes them not so bad). No savings? No stimulus.

  5. Dave   December 5, 2008 at 9:47 am

    There is another side to the “excess capacity” coin — that being to reduce capacity by allowing some of these too-inept-to-succeed corporations (and I’m not just talking auto companies, the big banks are even worse, IMHO) to fail. Yes, there would be shock waves from their demise, and that is where I think the government spending should be targeted, providing guarantees and liquidity to let the bystanders in the industry survive the splash that these TBTF entities would make upon failing.In the end, allowing companies that are too inept and ineffective to grow without government assistance will allow other firms to enter their economic space, and grow using the markets that were unable to adequately support the failed monsters.And what’s wrong with busting up Freddie and Fannie, into a dozen (or more) smaller entities, releasing them back into the wild, instead of having them provide Treasury-backed competition for otherwise profitable and competent mortgage lenders?What we are seeing if a government response to sick TBTF entities being to make them even bigger, in a warped “hair of the dog” economic treatment.In the end, the one undeniable thing is that our economy IS shrinking, we can either face up to that and adjust things accordingly, or practice denial and try to stuff the too-large economic infrastructure with government paper in order to make our 5-lb turkey look like a 20-lb bird. If the economy could be grown in real terms via government spending, then if would be spend-spend-spend and we would be the most prosperous, economically healthy nation on earth. But we know that it doesn’t work that way.I’m not completely averse to some Keynesian spending, but I also want to see some downsizing going on as well.

  6. John L. Keenan   December 5, 2008 at 11:34 am

    Repairing the railroad system is an idea I haven’t heard yet fron the economists and politicians. Railroads in the East badly need rebuilding and such repair would provide us with an alternative means of surface transportation in an emergency. While unglamorous and no longer high-tech, restoring the railroad system is an infrastructure project that would serve the public future.

  7. Anonymous   December 6, 2008 at 7:49 pm

    We have people here who are promoting New Deal pt.2 for pete’s sake. Everyone knows that Hoover and FDR meddling in the economy is what caused it to drag on for so much longer than it should have. The government needs to spend more??? Are you insane??? China and the rest of the nations financing our debt are going to cut us off if we continue to spend like drunken sailors. I cannot believe what I’m hearing from what are supposed to be some of the brightest economic minds in the country.The best thing the US government could do right now is draw down its overseas empire which would free up a sizeable chunk of money to start paying back our outrageous debt. Secondly, cut more department’s out of the government. I know, blasphemy, but unless you are just a complete moron you aren’t grasping the magnitude of the problem facing this nation. We have unfunded liabilities that could go upwards of 80 trillion dollars over the next 20 years. We just don’t have the money to pay for everything the government is supposedly providing right now, and the answer is to spend more???Keynes was wrong and it’s been proven over and over again. the life of me I can’t figure out why nobody will listen to these guys. Economics based off common sense.