The Crisis and American Economists: The Re-Entry of Liberals and the Rediscovery of Keynes

by Michael Blim

In Washington, D.C., liberals are back, and so is J.M. Keynes. As financial panic has swept through the American economy, economists on the center-left who had drifted toward the doctrinaire neoliberalism of de-regulated markets and a state apparatus friendly to capitalist expansion have made a big course correction. Regulation is back, signaling a return to the last century progressive politics of Theodore Roosevelt and Woodrow Wilson.

But as the threats of domestic deflation and a growing American output gap have put the fear of the Great Depression into the new Obama administration, the same liberal economists so taken with neoliberalism have embraced J.M. Keynes once more. The Keynes of massive fiscal stimulus, and to a lesser extent the Keynes of Bretton Woods, are now in desperate fashion.

We are likely about to see a finely tuned, more technically adept New Deal II. This time, though, Obama, unlike Franklin Roosevelt, will likely have fewer qualms about spending as much as it takes, nor apparently for as long as it takes. With two economic historians of the Great Depression close at hand, Ben Bernanke at the Federal Reserve and Christina Romer at the Council of Economic Advisors, Obama has doubtless internalized the lesson learned through Roosevelt’s mistake of calling off massive fiscal stimulus too soon and contributing to the 1937 plunge back into deep recession.

Of the liberal economists who are public figures, Larry Summers will probably turn out to be the most important, as he appears to have been become the de facto quarterback of the Obama economics team. His academic reputation rests upon rigorous empirical analysis of questions designed to upset conventional wisdom in a wide range of economic sub-fields. Formerly a deficit hawk and a defender of unregulated derivatives markets, Summers was one of the first (though Paul Krugman was way ahead of everyone) to recognize the gravity of the current crisis and quickly shifted onto Keynesian ground in calling for massive fiscal stimuli, and in particular redistributive strategies that would put resources into the hands of the working and middle classes.

Others have similarly forsaken neoliberalism’s strictures for liberalism’s largesse. Jeffrey Sachs, the economist who prescribed “shock therapy” for ailing Bolivia in 1983 and the same for former socialist countries such as Poland and Russia after 1989, now heads up the Earth Institute at Columbia University and is the Director of the United Nations Millennium Program. He represents a growing number of American economists that have been supporting direct American state intervention wherever vital economic interests are threatened by the current crisis. Sachs is currently pressing for direct economic relief for the U.S. auto industry, a position opposite to but consistent with his past remedies based upon state-centered economic activism.

Joseph Stiglitz, former chair of the Clinton Administration’s Council on Economic Advisors and former chief economist of the World Bank, won the Nobel Prize for showing the adverse and unexpected effects caused by asymmetries of information that often underlie market transactions. Not surprisingly, he is a vigorous advocate of the regulation of financial markets. He is also highly critical of the U.S. for abusing its hegemonic role and distorting capital markets and international trade for its own ends. In some respects, Stiglitz’s advocacy of fair trade for poor countries in the Doha round underscores the return of the Bretton Woods Keynes where trade, though free, is rationalized through international agreements and rules.

Stiglitz, Sachs, and Summers, the “three S’s,” (and perhaps adding Krugman, we couldemploy an accounting firm rhyme like “SSS & K”) highlight fairly the shift in economic belief and strategy brought on by the economic crisis and Obama’s victory.

Call it the “’New’ New Deal.” It consists of: (1) as much fiscal stimulus as necessary to push up demand and avoid deflation; (2) activist state intervention to save and/or restructure vital parts of the national economy; and (3) strong regulatory measures to curb abuses of markets and to assure that they function with maximum transparency and efficiency. Commitments to free trade with “fair trade” concessions for poor countries and assistance for dislocated workers in rich countries remain surprisingly strong, perhaps another legacy of the Keynesian analysis of the Great Depression that guides current thinking.

Will it be enough? Can the “’New’ New Deal” work this time?

There are some problems.

First, it is important to recall that even the great Roosevelt was unable to avoid a breakdown in his economic policy consensus and a tardy response to the deep and terrifying recession that broke out in 1937. It was “Dr. Win the War,” not “Dr. New Deal,” Roosevelt admitted that pulled the country out of the decade-long ditch of the Great Depression. Perhaps this time, there will be no Henry Morgenthau, Roosevelt’s apple-farming upstate New Yorker and Treasury Secretary, to push balanced budget orthodoxy.

But Keynesian fiscal liberals were not compatible with the regulators, anti-monopolists, and state interventionists then, and there is not yet sufficient evidence to suggest that the tentative Obama-suggested consensus to stimulate and regulate will hold. It will turn on the degree to which economists like Summers have truly rejected their earlier support of unregulated or lightly regulated markets.

Second, the political environment has already turned ugly. The crisis has fired up class antagonisms – as it should, given that the economic collapse is forcing the rich to flex their muscles in saving their huge piece of the American pie while the working and middle classes cast about for some part of the American political machine to save them from ruin. Nasty populist impulses are emerging. Columnists either venting or trying to make their bones through character assassination are calling for corporate heads. Senator Chris Dodd, the silver-haired and silver-spooned senator from Connecticut, whose only management experience as best I can figure consists of running a 25 person congressional committee with staff, wants GM’s Wagoner cashiered. My own Representative in Congress Michael Capuano whose only claim to management fame is having been mayor of Somerville Massachusetts (population 77,000) feels entitled to hurl insults at the Big Three bosses from his cushy Committee chair.

Then last week, we saw the right wing vent its collective spleen, trying to take income away from the Big Three’s autoworkers, a chunk of the miniscule portion of American blue-collar workers who actually earn a living wage.

Before I get the usual grudge letters, let me remind my readers that US median family income is about $50,000 a year. So right-wingers are not only sanctioning southern autoworker pay that is under the US median, but also busting the northern automakers for that big, outrageous $7,000 “excess.” Seven thousand dollars covers an equivalent of 2 years of braces for a kid, less than 6 months of the typical mortgage, only half of the average New Jersey taxpayer’s annual real estate tax bill, and so on. Get it? Only in Tennessee (pace Senator Corker) or in right-wing America generally can wage cuts be seen as right and just – and a solution especially in a time when consumer consumption is plummeting and deflation alla the Great Depression seems just around the corner.

Third, as Frances Fox Piven has noted in a recent Nation, Obama and the Democratic Party are not going to move the country beyond a kind of name-calling, opportunistic populism unless they are pushed to by popular unrest and pressure from their left and from below. Hell, one has to ask if even the sainted Franklin Roosevelt (he was and is still a saint in parts of my family including me) would have moved the New Deal to the left had it not been for Father Coughlin, Huey Long and Dr. Townsend.

So start pushing. Aim at policy rather than people – except that is for those of you who have irresponsible public servants. Call people out on class differences. Avoid demagogic name-calling. But by all means, push.

This is the “big one.”

Next time, I will talk about why I think even a generous replay of the New Deal, or what I called here the “’New’ New Deal,” is not enough to save our bacon.