Jamie Galbraith wrote about this back in 1996, as Bill Clinton was facing a by-no-means-sure re-election, in The Surrender of Economic Policy The American Prospect Mar 1996. For some reason, the article at the link now says December 19, 2001, but it's from the March 1996 issue.
Like Obama today, the Clinton Administration had adopted moving toward a balanced budget as a guiding principle of its economics policies. Both Clinton and Obama really seem to believe that a balanced budget is a virtuous goal of policy in itself. But there are a number of reasons making it a central goal of a Democratic Administration is self-limiting and/or self-defeating for Democratic Administrations. Galbraith:
To accept a balanced budget and the unchallenged monetary judgment of the Federal Reserve is, by definition, to remove macroeconomics from the political sphere. Thus, the remaining differences between Clinton and the Congress are over details. Should we head for budget balance in seven years, eight, or ten? Should we cut (or impose) this or that environmental regulation? Do Head Start, the AmeriCorps, and technology subsidies justify their cost? And so on, in long litanies that no one believes will make a fundamental difference in American lives. Even if there were substantial gains to be made by public investments on the supply side, the conservative fiscal consensus precludes them by denyingthe resources.But the Clinton Administration in 1996 was apparently guided by some more coherent economic policy theory than the Obama Administration. Galbraith noted that New Keynesians were "a breed found throughout the Clinton administration."
We have now seen two Democratic presidents--Carter and Clinton--deeply damaged because they did not dispute this orthodoxy in good time and therefore could not control the levers of macro policy. Macroeconomics, not microeconomics, is the active center of power. Practical conservatives understand this. It is no accident that conservatives always seek to control the high ground of deficit and interest rate policy, nor any surprise that liberals defeat themselves from the beginning when they concede it.
Yet, the economics behind this consensus is both reactionary and deeply implausible. It springs from a never-never-land of abstract theory concocted over 25 years by the disciples of Milton Friedman and purveyed through them to the whole profession. Liberals--and anyone else concerned with economic prosperity--should now reject this way of looking at the world. [my emphasis]
The Obama Administration, by contrast, seems to be relying on a general orientation that said we just needed to shore up the failing giant banks in 2009 and the economy would soon bounce back to a healthy state. Those like Paul Krugman who took the Keynes part of New Keynesian seriously realized, especially after the Japanese depression of the 1990s, that depression economics was still relevant to the present day. But policymakers in the Obama Administration and Europe have fastening onto a bizarre and destructive austerity economics during the current depression.
Galbraith in that article gives a useful and accessible description of one the favorite myths of conservative economics, the "natural rate of unemployment". Galbraith wrote that in 1994, "the natural rate" was "estimated by numerous astrologers at about 6 percent." We don't hear a lot about that today, because even Republicans don't want to say that the depression rates of unemployment are "natural". But if you listen closely to David "Bobo" Brooks talking about "structural factors" or whatever, you can tell there's a similar idea still waiting to justify do-nothing policies in the face of high unemployment. But it's basically a simple propaganda point with no real-world content to it.
We're also seeing today some of the serious repercussions of the Democrats surrendering what these days we call The Narrative on economic policy to the Republicans. Because the Democrats bought onto the concept of the singular virtue of balancing the budget and the general uselessness of macroeconomic policies, now we have a bipartisan consensus in Congress on austerity economics in the middle of a depression.
Galbraith's 1996 article spelled out what a limited menu of policies that even New Keynesianism was offering then:
At the very least, New Keynesian acceptance of the New Classical theoretical structure reduces macroeconomic policy to the fringe role, that of large-scale intervention only in deep and lasting recessions. In all other circumstances, the macro authorities are warned off--as was Clinton himself during his brief Keynesian phase in early 1993.However, if New Keynesians favored "large-scale intervention only in deep and lasting recessions" in 1996, there has been a downright devotion to austerity economics in the Obama Administration. It's interesting to note that, like Obama, Clinton had "his brief Keynesian phase in early 1993" in the early months of his Administration. But Clinton took office with an economy beginning recovery, and in which depression conditions had not taken hold. If Clinton's economics policies in his first Administration were too timid, Obama's have been terrifyingly so.
What then can liberals do? The actual approach of the Clinton administration illustrates: Liberals can favor education, training, adjustment assistance, and other programs that upgrade skills and help workers move from one job to the next. They can support public investments in infrastructure, on the ground that these assist in the international competitiveness of the economy. They can support a combination of research and development assistance to advanced enterprises, alongside efforts to open foreign markets to American products, that help shore up the position of American companies in the world. If they are feeling brave, they can also support a higher minimum wage.
All of these are supply-side measures (except the last, which is a direct intervention in the labor market). Their purpose is to improve the long-term competitive performance of the American economy, on the thought that a more productive economy will generate higher average living standards. The further thought, that these higher averages will trickle down to low-paid production workers, is left as an assumption.
Galbraith also provided useful observations about the limits of the New Keynesian nostrums, which I summarize here:
Education and Training: They are necessary and critically important but they don't create jobs in themselves. Also, US public schools aren't nearly as bad as conservatives claims they are.
Research and Development: Advances in technology "do not and cannot bring full employment, nor do they bring about a fairer and more just social order. To make science and technology policies the centerpiece of a progressive agenda, while giving up macroeconomics, is absurd."
Infrastructure: Great stuff, but Democrats make a mistake in justifying public works primarily as support to the private sector to make the US more competitive internationally rather than also stressing their value in creating jobs. And in any case, the claimed benefits to private "cost reduction and increased output" are based on thin empirical evidence. Instead, liberals ought to be stressing the value of infrastructure for the people.
And Galbraith stresses that Democrats needed to make fairness in wealth distribution a central issue for economic policy:
Once the basic distribution of income has been set right, further gains in real wages can only happen, on average, at the rate of productivity growth. But toIt took 15 years, a depression, union resistance to Republican Governors' aggressive antilabor push, and the Occupy Wall Street movement to force the Democratic Party to start taking this issues more seriously. And so far, it hasn't gotten beyond lip service.
keep the distribution from getting worse again, these gains should be broadly
distributed, substantially social and only slightly industrial or individual.
In other words, we need to return to the principle of solidarity--that the
whole society advances together.
Democrats need to start listening more to the Jamie Galbraiths, Paul Krugmans and Joe Stiglizes of the world and less, much less to investment bank executives.
Tags: austerity economics, james galbraith
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