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.
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