Wednesday, June 15, 2011

Keynes' False Dawn

Jamie Galbraith paints a grim picture of the short lived infatuation with Keynes in policy circles after the crisis.  He says:
"In the high crisis just two years back, the cult of John Maynard Keynes saw a dramatic revival. Deficits were acceptable, stimulus plans became law, books entitled Return of the Master and The Keynes Solution rushed into print. Enthusiasts spoke of a “new New Deal.” Today, although the economy has not recovered, and although unemployment remains near 9 percent, none of this remains.

Barack Obama declined to become a third Roosevelt. His Bernard Baruch proved to be Robert Rubin. There is no Wagner in the Senate, no Eccles or Currie at the Federal Reserve. The agencies that harbored Leon Henderson and the young John Kenneth Galbraith do not exist. If Keynes were alive today and came to visit, one wonders who in official Washington would see him.

The new dawn of the Keynesian idea has gone dark."
He suggests that the reasons are not associated to the radicalism of Keynes' ideas, but to the fact that there is no economist with the kind of influence that Keynes had back then.  In his words:
"It wasn’t that he taught that that thrift is a vice, or that savings are pathological, that deficits are helpful, that debt is necessary, that interest rates should be kept low, that the economy should be run at full employment for the good of all. It wasn’t even his reference at the end of The General Theory to the 'euthanasia of the rentier.'

No, it was the fact that Keynesian policy required Keynes. And if Keynes were in charge, then the captains of industry could not be. Larry Summers is not Keynes. But he did give the impression, for a while, of running the show. This was a fatal error. It was the impression of making policy that business and the Tea Party could not stand. A better policy would not have been better liked.

With Jeffrey Immelt, we now have a business face and no economic policy at all. The president has learned. Whether it will save him be remains to be seen. A full government of business people would be much more authentic."
In other words, Immelt and business types are behind economic policy, and Summers is less influential than Keynes was.  Not sure I agree with this one.  Keynes wasn't that influential during the 1920s and 1930s, in neither side of the Atlantic.  And the likes of Baruch, Currie, Eccles, and Wagner, responded more to common sense than to Keynes theories.  Further, Summers is part of the problem (even if he gets that we need more stimulus), because he was instrumental in the process of deregulation.  I think the main problem in the US is that Democrats are now, and since Carter (reinforced by Clinton), the other party for business.  There is no people's party, somebody for higher wages, strong unions, and full employment.  In that context, Keynes' ideas had no real chance.

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