Do current times vindicate Keynes and is New Keynesian macroeconomics Keynesian?

Thomas I. Palley, Esteban Pérez Caldentey and Matías Vernengo

Professor Robert Rowthorn delivered the second annual Godley–Tobin lecture in New York City on 1 March 2019. The title of his lecture was ‘Keynesian economics – back from the dead?’ and it is published in this issue of the Review of Keynesian Economics. The lecture was attended by a large audience and the Question & Answer session provoked a stimulating discussion. Prompted by that discussion, we thought it would be interesting to invite some leading economists to independently address Professor Rowthorn's lecture topic. This symposium is the outcome of that invitation.

We are living in a time which many believe has a distinctly Keynesian character. That is captured in the belief that many economies appear to suffer from aggregate demand shortage or, at least, a proclivity to demand shortage. It is also captured in the revival of the concept of ‘economic stagnation,’ which was an idea that had much traction in the 1930s and 1940s but then fell away in the 1950s with the post-war boom and the non-reappearance of depression-like conditions.

Another Keynesian feature of the times is the character of macroeconomic policy, particularly fiscal policy. Following the financial crisis of 2008 and the Great Recession it spawned, there was a global turn to sizeable coordinated fiscal stimulus. Though that turn was truncated (Keynesians would say mistakenly), its legacy remains in place in the sense that discretionary counter-cyclical fiscal policy is back. That is evident in the renewed widespread belief among economists and policymakers regarding the value of fiscal stimulus to combat recessions, though the details of when, how, and how much are still contested. That contrasts with the situation before the Great Recession when the mainstream consensus was that discretionary counter-cyclical fiscal policy was largely ineffective.

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From the last issue of ROKE with free papers by Rowthorn and Eichengreen.

Three part interview with Jamie Galbraith

At the German website NachDenkSeiten (here, here and here for the English transcripts). In the last one, important to note his views on why the Obama fiscal package and the momentary Keynesian period was insufficient for recovery. He says:

"The crisis imposed a momentary intellectual discipline and a resurgence, a reassertion of Keynesian principles. But that discipline did not extend into decision-making circles, at least not deeply enough, and it was overridden by, let's say, existing protocols, existing habits of thought and action that had developed in policymaking circles. And those protocols and habits precluded taking adequate action. What I mean by that specifically is that you had ways of making forecasts which were intrinsically too optimistic, intrinsically assumed that you were going to return to a baseline over a five-year time frame. And that meant that you were not going to get even presented to the president the possibility that the crisis was on the scale of the 1930's."

This has important implications for Europe, which since yesterday, will have a Socialist in charge in France. Also, on what has happened with left of center parties around the globe.

"What were historically left parties both in the United States and Europe, equally true of the Democrats and the SPD and the PS in France have adopted what would have been in earlier times considered to be right-wing orthodoxies, particularly with respect to budget deficits, public debt. So they can pretend to be in favor of solidaristic social policies, but unfortunately unable to do anything in the face of the realities they allegedly face" [italics added].

As far as I can tell only in Latin America, some left of center parties, that had moved to the right in the 1990s, returned to the fold in this century. As he notes, in the case of the US and Europe the collapse of the Soviet Union played an important role in the political changes of the 1980s and 1990s. In Latin America the return of left was associated to a more significant collapse of the neoliberal model. One can hope that the obvious collapse of the austerity programs in the developed world would lead to a revival of the left. Hope springs eternal.