Democrats and the Death of Keynesian Economics

It is quite remarkable, given the nature of the recent debate over economic policy in Washington, that a Wikipedia article exists today called, “2008-2009 Keynesian resurgence.” Today, both political parties have had an obsession with “austerity measures” for at least last year or so – which includes putting Medicare and Social Security on the chopping block. Barack Obama's weak job bill, which was dead on arrival, only further demonstrates how twisted priorities are in Washington. So, it is actually hard to believe that, in the aftermath of the near-collapse of the economy in 2008, Maynard Keynes, who advocated government intervention in the economy to increase demand during downturns, was making a comeback.

But for a brief moment in time, this was indeed the case. After the 2008 bailout of Bear Stearns, Martin Wolf, an economics writer for the Financial Times and normally a staunch supporter of free-market globalization, wrote: “Remember March 14 2008: it was the day the dream of global free market capitalism died.” In the same article, he quoted Joseph Ackerman, the chief executive of Deutsche Bank, saying: “I no longer believe in the market's self-healing power.” In an October 10 article, The Washington Post – in all seriousness – suggested that the current economic crises meant the “The End Of American Capitalism” as we know it. The cover of Time magazine in February 2009, said, “We are all Socialists Now,” referencing the need for government intervention to save us from the ills of capitalism. “Whether we want to admit it or not,” the article observed, “the America of 2009 is moving toward a modern European state.”

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As frightening and tragic as the economic crisis of 2008 was, having these widely held doctrinal assumptions about the power of the so-called “free market” spun on their head did provide some hope. Maybe there could be some sort of shift toward a more humane mixed economy that reined in the horrific excesses of contemporary capitalism. The country was optimistic; a new president had just been elected and his chief of staff Rahm Emanuel, famously said that he “never wanted a serious crisis to go to waste.” The Nation magazine even called for a “New New Deal.”

What followed, unfortunately, was a very underwhelming flirtation with Keynesian policies (such as the too-small stimulus bill in 2009), which was then swiftly overwhelmed with bipartisan discussions about how to gut government spending and create on austerity movement. This occurred despite the fact that the need for Keynesian economic policies are just as great now, in the face of crippling unemployment, as they were in 2008-09.

Somewhere shortly after being elected, it seems, Obama and Democrats closed the book on Keynes and opened one on Herbert Hoover – who famously helped spawn the Great Depression with austerity measures in the 1920s. “This is truly a tragedy,” wrote The New York Times' Paul Krugman, responding to an Obama speech in July 2011, in which he reiterated classic right-wing talking points about the need for cutting spending. “The great progressive hope is falling all over himself to endorse right-wing economic fallacies.” Indeed, the language of austerity has been dominant among both parties in Washington for a year, as has also been the case in the mainstream media. The Keynesian Resurgence, referenced above, is completely dead in the nation's capital. The crisis Rahm Emanuel so wanted to take advantage of has indeed gone to waste.

How Did This Happen and What Can Be Done About It?

The death of Keynesian economic policies in Washington is a cause of major concern. As Kevin Young recently expressed in blunt terms, “Cutting the deficit and the national debt at the present time is stupid and will only exacerbate unemployment.” Economist Robin Hahnel notes, “[Keynes] is surely rolling over in his grave at what amounts to global economic suicide and a return to misguided, nineteenth century economics … This was the advice of Treasury Secretary Andrew Mellon which Herbert Hoover acted on in 1929.” Even the neoliberal International Monetary Fund has confessed that “the idea that fiscal austerity stimulates economic activity in the short term finds little support in the data.”

The death of Keynesian policies in the US demonstrates the pervasive stranglehold the wealthiest corporations have over our government and, notably, the Democratic Party (which often claims to be the party that represents the middle class). Keynesian economics once was at the heart of the Democratic Party's platform. Now, as blogger Atrios observed, “It's the austerity party vs. the austerity party.” Conservative Market Watch writer, Stephen Stanley, (in an article aptly titled “The Death of Keynesianism,”), celebrated that “[a]dministration officials are finally willing to own up to the fact that Keynesian prescriptions have been a) a dismal failure and b) a massive waste of money.” Stanley is wrong about the economics, but right in his assessment of Obama's approach, which is a rare reprieve from right wingers constant and absurd insistence that Obama is a far-left socialist.

Democrats will counter that the jobs bill proves that the Democrats do prioritize jobs over spending cuts and it is merely Republicans obstructionism that keeps the economy from growing. This position, however, is disingenuous. The Democrats knew the jobs bill would die and merely wanted a political weapon against Republicans. If the Democratic Party was serious about passing legislation that included job creation, it could have pushed for them when it had leverage – such as the end of 2010 when the Democrats, still with large majorities, extended the Bush Tax cuts while getting almost nothing in return. But to throw up a hopeless $700 billion jobs bill – that would be insufficient even if it did pass – on the heels of passing $4 trillion in spending cuts, without a single penny of tax increases, is not about to fool the public, as the demonstrations on Wall Street show. Obama has even suggested, as Dean Baker reported, that “he wants the congressional super-committee to find additional cuts to cover the cost of the stimulus,” which basically defies the Keynesian philosophy of creating demand through government spending.

The Democrats willingness to accept right-wing falsehoods about the nature of deficits and debt is likely to come at a steep price for those Americans struggling to get by. While job creation is going nowhere, the public can look forward to the “Super Congress,” created as part of the debt ceiling deal, taking a scalpel to the social safety net. Subsidized loans for graduate students has already fallen victim to the process, further squeezing young people who are now drowning in debt that they will never be able to pay back in this economy. These cuts just scratch the surface of what damage will be done to the economy and working class in particular. What exactly will happen to Social Security and Medicare is still unknown, but cuts and/or an increase in the retirement age are quite possible.

This could prove to be politically dangerous for Democrats, as voters have expressed in poll after poll that they do not want cuts to these programs and are far more concerned with jobs than with the deficit. In a recent CBS/New York Times poll, 53 percent said jobs was the most important problem facing the country today, compared to just 7 percent who said the deficit/debt was the most important. But the party seems less concerned about alienating working class voters (who they so often take for granted) and more worried about courting large donations from hedge fund owners and the like. This is especially true in the post-Citizens United era, where campaign donations from large corporations trump the vote.

The left has no choice but to demand that the government act to, not only save social security and Medicare, but also to create jobs. Mark Weisbrot has suggested voters make such policies a litmus test for candidates in 2012. “Maybe voters should make it a 'litmus test' for every Congressional candidate in November: no new stimulus, no vote,” he wrote. This will first require massive education of the true nature of our deficit to counter the nonsense repeated endlessly by the media and politicians. The public is constantly told that our deficit woes are due to Social Security and Medicare, when in fact, these programs are paid for with trust funds and payroll taxes and are not responsible for the deficit.

In reality, military spending and escalating health care costs (due to our inefficient private system) are among the major reasons for the deficit. As Young notes, “This year, as in all recent years, the US government will spend about half its total budget, including about two-thirds of all discretionary spending, on 'security' – meaning the military, multiple overseas wars, nuclear weapons, costs incurred by past military expenditures and so forth.” Ending our wars in Iraq and Afghanistan quickly, for example, could cut the deficit by a trillion dollars.

And our nation's insistence on allowing private insurers to run our health care system is another crucial problem. As the Center for Economic Policy Research proves with its Health Care Budget Deficit Calculator, if the United States switched from its current private health care system to a system used by any other developed nation – Germany, France, Canada etc. … – our deficits would turn into a surplus. “However, because of the power of the health care industry, it is much easier politically to roll back benefits in public sector programs than to reduce the cost of health care, which would mean reducing the income of providers,” notes Dean Baker. “Therefore our politicians only discuss the health care crisis as a budget crisis. So we get the illusion of a long-term budget crisis.”

The good news is that the public, finally, is demanding change via the Occupy Wall Street protests. And unlike in previous years, they are taking it to the streets, as opposed to merely donating money and time to Democrats and hoping for the best. In fact, the abandonment of Keynes has also changed the game for many radical activists, who can now find common cause with more moderate activists and labor unions. As Robin Hahnel observes, given how no political parties in Washington are fighting for Keynesian policies, radical activists and socialists find themselves in the odd position of having to advocate, not merely for alternatives to capitalism, but also for liberal Keynesian policies in the short term. He writes:

While socialists should not have to lead the charge for Keynesian policies to ameliorate capitalist crises, unfortunately that is the position we find ourselves in. Right now we must not only do our own work – explaining why all versions of capitalism are far less desirable than participatory, democratic socialism – but do the work of Keynesian reformers as well who have lost influence in all major political parties … there is no road to participatory, democratic socialism that does not run through many successful reform campaigns to bring Keynesian policies back in vogue.”

The reality is that our economy has been so bad for the working class, that the public is quite united in the desire for a fundamental change to the way wealth is distributed. This helps explain why a serious protest movement has sprung up this year and not in year's past. While protests were once dominated by people who read Marx, now they are also made up of people who are reading their pay stubs, if they are fortunate enough to have one.

It is rather depressing that in the midst of such economic turmoil that both political parties are promoting insane, counterproductive economic policies that will cut social services, worsen unemployment and keep demand low. But the good news is that the public has expressed complete support for the preservation and protection of social programs and the people are beginning to resist the narrow adherence to neoclassical economics that exists in Washington. In sum, we must all be Keynesians now, to some extent. The only choice we have is to demand that the government preserves and expands on our safety net and works to prevent mass unemployment. This can only be achieved through struggle, protest and disobedience. If the working class can win some of these battles – no easy task given current realities in Washington – it will serve in raising class consciousness, mobilizing workers and could help initiate more fundamental change in the future.