Friday, April 26, 2013

When were we Keynesians?

From a policy point of view, in the United States, the two common periods associated with the ascendancy of Keynesianism are right after the so-called Roosevelt recession in 1937-38, when Currie and Eccles and other fiscal expansionists got the upper hand in the dispute with Morgenthau and the deficit hawks, and the Kennedy-Johnson tax cut in 1964, when the New Economics became dominant in the Council of Economic Advisors (CEA), during Walter Heller's chairmanship, when James Tobin (among others) was a staff member.

And it is correct that in both periods expansionary fiscal policies, which are broadly Keynesian, were actually pursued. But it would be a mistake to think that Keynesian ideas actually won the day, and became common sense among policy makers and the political elites in the US. In fact, while Keynesian ideas and Keynesian economists became dominant for short periods, for the most part political elites remained firmly conventional and remained wedded to sound finance ideas. Without World War II and then the Cold War, which allowed for some type of Military Keynesianism, Keynesian ideas would not have had a chance.

In theory too, while Keynesian ideas associated to the possibility of unemployment in the short run became dominant, the reason was not Keynes' own explanation that this would be the normal, long term situation, associated even to a situation with wage and price flexibility. Unemployment was seen as an imperfection, something that required in the short run a brief stimulus, but that did not have significant long term effect. Hence, by the 1950s if small deficits in recessions or war periods would be acceptable for politicians, they were certainly not seen as desirable as a longer term instrument for economic development.

Domar, Lerner and other Functional Finance authors, that took Keynes' fiscal ideas to their logical conclusion never became dominant. In a sense, we can say that we were never truly Keynesian. Only by the 1970s a sort of perverse Keynesianism would eventually prevail within one of the wings of the Republican Party. Supply-siders would argue that lower taxes, not as a result of its multiplier effects, but as a result of the incentives to invest, would lead to higher growth, hence deficits were not a problem. This was embraced by some more mainstream Republicans also, as a way of promoting the 'Starve the Beast' strategy, i.e. cut taxes in a boom, and force welfare cuts in a crisis (any similarity with current events is totally not a coincidence).

On the other hand, most Democrats, which were never particularly Keynesian, moved away even from a short term defense of anti-cyclical fiscal policy. For that reason we should not be surprised that austerity, and sound finance ideas have gained so much traction in recent debates about the Great Recession, and why we should continue to have a very slow recovery.

PS: The significant victory of Keynesians was less about the consensus on anti-cyclical fiscal policy than the implementation of programs that established automatic stabilizers, like unemployment insurance.

PS2: Krugman today says that the austerian's position has imploded with the Rogoff-Reinhart debacle. Also, he shows that most Americans actually are not concerned about deficits, but the wealthy are. I guess politicians respond to the wealthy then. Like in gun control, what the majority wants does not necessarily translate into policy.


  1. Keynesianism did, however, win the day in Britain from WWII until Thatcher. The debates within the treasury in the 1970s are fascinating reading. Of course, Britain was in serious decline in this era, so we never saw any real results.

    1. Sure, but Labor was seldom in power, and Tories were never truly Keynesian. They just didn't try to destroy welfare before Thatcher. Besides, note that the country with the key currency, that could be Keynesian on a global scale w/o BOP problems, was the US in the post-war period. the UK actually had two major BOP crises 1949 and 1967, and eventually went to the IMF in 1976.

  2. Should really mention the redoubtable Beardsley Ruml, I think the one who actually convinced FDR to run a deficit, using his full-employment budget reasoning.

    Without World War II and then the Cold War, which allowed for some type of Military Keynesianism, Keynesian ideas would not have had a chance. Violently disagree with this. What would have happened in the USA without the war? FDR would have just run the first planned peacetime deficit in history, after the Roosevelt Recession boo-boo, and it worked - with far smaller expenditure than the war. The New Deal and its core- the jobs programs would have remained and been seen by everyone to be necessary, and highly beneficial and not unAmerican, recent history having been as near a controlled experimental test as imaginable. The New Deal would have had time, time to change more minds, and more of its beneficial institutions would have remained in place, to the enormous and longlasting benefit of the USA and the rest of the world.

    1. Not sure what violently disagreement would be. What you do there is counterfactual history. What would have happened in the US without war. I don't do that stuff. What would have happened if Keynes was not born? Who cares. The point is that what happened, as Galbraith famously put it, is that Hitler having ended unemployment in Germany, went on to finish it for his enemies. It's well established that military Keynesianism is what worked. And also, w/o the Cold War no Marshall Plan and no global Keynesianism. Again a fact, not a counterfactual. Pay attention to what happened, not what would have happened if what happened didn't happen. More fruitful as a line of inquire.

    2. Matias: You brought up the counterfactual by saying "without". I just meant "very strongly disagree" with the resulting counterfactual history you suggested - that Keynesian ideas "would not have had a chance".

    3. Oops. Got your point. But mind you, I didn't mean that as a counter-factual. Since Kalecki (1943) there has been some understanding that capitalists don't like full employment, and unless there are some exogenous pressures they avoid it.


Prebisch After ECLAC and UNCTAD

My talk at the Universidad Nacional de Colombia last Friday, in Spanish of course. Part of the argument is that Prebisch, contrary to what i...