Communist revolutionary Che Guevara rapidly became an inspirational figure for
revolutionary socialist change after his execution in Bolivia in 1967. Forty
years later, Che lives on - his image adorning t-shirts that have become
popular fashion statements. This transformation reflects the extraordinary
power of markets to capture and transform, turning an avowed enemy of the
market system into a profit opportunity.
The process also holds for economic policy, which has witnessed the
conservative capture of Keynesianism. This capture is now on display as US
policymakers struggle to contain the effects of a collapsing house price bubble
that was recklessly funded by Wall Street. The sting is that the full powers of
Keynesian policies are
being invoked to save an economy that no longer generates Keynesian outcomes of
full employment and shared prosperity.
The political economic philosophy of Keynesianism emerged after World War II
following the catastrophic experience of the Great Depression. The new paradigm
advocated an economy with full employment and shared prosperity and gave
government the critical role of regulating markets and adjusting monetary and
fiscal policy to ensure levels of demand sufficient to generate full
employment.
These Keynesian tools are now being applied forcefully. The Federal Reserve has
dramatically cut its interest rate target in response to financial sector
weakness. Its goal has been to shore up asset prices, prevent further financial
losses, lower mortgage rates to make houses more affordable and prevent further
defaults, and to stimulate spending by lowering the cost of capital. Moreover,
the Fed has done this despite consumer price inflation being above 4%.
Simultaneously, the administration of George W Bush has pushed for fiscal
stimulus, albeit with its usual preference for tax cuts benefiting business and
the rich that deliver little bang for buck. The Democrat-controlled Congress
has also gotten in on the act with stimulus packages that are better designed
but still contain plenty of expensive and relatively ineffective tax cuts.
On one level, policymakers are absolutely right to take these measures, as the
costs of a financial and economic meltdown are so large. But true Keynesian
policy would also address the failure to generate full employment and shared
prosperity.
The current US economic expansion looks like being the first in which median
household income fails to recover its previous peak. Job growth has been tepid
for much of the time, and the employment-to-population ratio has remained well
below its previous peak. This dismal experience comes on top of three decades
of wage stagnation during which household income only grew because of longer
working hours and having both household heads work.
The capture of Keynesianism has been a gradual process. In the 1950s, military
Keynesianism became the hallmark of American policy, with defense spending
becoming a huge and permanent component of government spending, to the benefit
of the war industry. President Ronald Reagan continued the process of capture,
pushing rhetoric and policies that undermined working families while
simultaneously running budget deficits that kept the lid on unemployment.
In the most recent recession of 2001, the Bush administration again invoked
Keynesian stimulus for tax cuts that contained minimal stimulus and were closer
to looting of government finances.
In 1971, president Richard Nixon famously declared, "We are all Keynesians
now." Nixon was half-right. Everyone recognizes the need and efficacy of
Keynesian policy instruments, including conservatives who are happy to promote
tax cuts and interest-rate reductions to support asset prices. However, most
have forgotten the Keynesian goals of full employment and shared prosperity.
The result is that Keynesian policy instruments remain, but Keynesian policy
goals have been abandoned. Both Democrats and Republicans are quick to push for
Keynesian stimulus policies when financial stability is threatened, but most
(including most Democrats) are silent when the economy fails to deliver shared
prosperity.
Keynesian full employment stimulus policies must be accompanied by Keynesian
structural policies that ensure wages grow with productivity, thereby ensuring
sustainable demand growth.
These structural policies include labor and social insurance laws supportive of
unions and worker bargaining power, and international economic policies that
prevent inappropriate competition and unsustainable trade deficits. The
conservative capture of Keynesianism has both obliterated these structural
policies and put a brake on reaching for full employment.
Thomas I Palley is the founder of the Economics for Democratic and Open
Societies Project.
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