Keynesianism May Be Just What Wealthy Industrial Nations Need

In the United States, and in the rest of the wealthy nations of the world, the seeming inability of governments to solve the problem of economic insecurity is rapidly leading to political polarization. As a result, we may be heading toward a replay of the 1920s and ‘30s. If so, a major reason is that we have forgotten the economics lessons so painfully learned in those years--particularly those taught by John Maynard Keynes.

To be sure, different nations exhibit different symptoms. Western Europe suffers from high unemployment, persistently more than 12% in France. In the United States, it is growing income inequality and job insecurity--even at 5.5% to 6% unemployment rates, low compared to Europe though high compared to our own recent past. The political results on both sides of the Atlantic pit natives against foreigners and the middle class against those at the bottom. Japan is different yet: A homogeneous, low-unemployment society has a remarkably low real standard of living because of high prices and constricting regulations, all of which lead to growing alienation from the political system.

The commonality is a failure of national economies, and the world economy, to provide what people in these rich countries need.

Why?

One contention in the United States and elsewhere is that instability and insecurity are caused by rapid technological change, leading to the disappearance of old jobs without their replacement by new ones. That is true but not new. Technology is always changing, and jobs are always disappearing; some of us are old enough to remember the dire warnings about the “automation revolution” of the 1960s, in which cybernetics was going to destroy a large chunk of existing jobs.

In the ‘60s, however, the economists of the Kennedy and Johnson administrations, led by Walter Heller, followed the tenets of Keynesian economics and used tax reductions and public spending to push the economy toward new job creation. That’s right: spending as well as tax cuts, leading to increased deficits, albeit temporary ones. The private sector decided which jobs it needed, but in the first half of the ‘60s, the overall demand for jobs was created by deliberate government policy. In the last half of the ‘60s, for better or worse, spending on the Vietnam War completed the task of pressuring the private economy to create jobs; unemployment dipped below 4%.

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Largely as a result of the oil shocks of the 1970s, however, public policy was no longer able to fight unacceptable unemployment without creating unacceptable inflation; governments fell on this issue in the United States (remember Jimmy Carter?), France, Britain, Germany and Canada. By the early 1980s, the situation had reversed. The collapse of oil prices made plausible a return to the possibility of using fiscal policy to guide economic growth. But the governments of that decade chose not to take advantage of the opportunity.

In the United States, the flight of Reaganomics into deficits too huge for any rational purpose had to be compensated for by ultra-tight monetary policies; the entire structure of economic policy changed. The cumulative size of the 1980s deficits has now frozen economic decision making into its current mode of deficit reduction uber alles, including over jobs and economic and social stability.

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In Europe, meanwhile, the Germans’ inflation fears motivated the Bundesbank--increasingly powerful across the integrating Western European economy--to allow unemployment to more than double during the 1980s; the enormity of the task of reconstructing eastern Germany, still far from complete, has made Germany’s task even more difficult.

In Japan, the restriction of domestic consumption so the country can live off the rest of the world seems cemented in by the all-powerful financial bureaucracies. The world’s three dominant economies are thus heading in a direction of slow growth at best.

Too many economists, including previous followers of Keynes and Heller, have justified the abandonment of growth-oriented fiscal policies by bowing to the principles of an economic conservatism that is really a return to the world of the 1920s. The 1980s and ‘90s have seen a revival of pre-Keynesian economics, avowing that government cannot push the creation of jobs.

In 1924, this orthodoxy led Britain, the world’s central economic power, to return to the gold standard prematurely, leading to unemployment and social instability in that decade. (See Keynes’ “The Economic Consequences of Mr. Churchill,” a commentary on the then chancellor of the exchequer.) The gloomy ‘20s led to the global Depression of the ‘30s, while the social instability induced by this sort of economics led we know where.

We can do it again; deficit reduction and fear of inflation are the orthodoxies of the 1990s. Yet we are not doomed to repeat the disasters of the first half of the 20th Century. The economies of the world’s rich nations have become so intertwined that it may not be possible for any single country to return alone to Keynesian tenets. But each of these wealthy nations has similar and increasingly acute social problems based on the return to old economics.

Perhaps together they can compete--not, as today, in mercantilist deflation, keeping prices down so we can each out-export the others, but in Keynesian stimulus, aimed at worldwide expansion of employment and production and restoration of social and political stability.

Then, when vigorous growth shows that a job for a darker-skinned Frenchman or American need not be a job taken away from his paler brother, France and the United States--and Germany and Japan, as well--might settle down and perhaps even turn their attentions to the truly horrendous problems of the really poor parts of the world.