Paul Krugman's Ideological Campaign for the Return of "Depression Economics"
Paul Krugman's Ideological Campaign for the Return of "Depression Economics"
http://www.politicalaffairs.net/article/articleview/7843/
Paul Krugman has launched a determined ideological campaign for the return of the ideas of John Maynard Keynes as the best and most effective framework, for both economic theory and policy, to address the rapidly spreading global financial and economic crisis. For public policy this campaign implies "very significant" public investments in jobs, income, infrastructure, education. By significant is meant surpassing in size, per year, – if you want to return to something greater than zero growth – the expected contraction in the economy from Dec, 2007, the official start of the current Recession, until it ends. The forecasters with the most accurate record in this crisis expect a 4-6 percent contraction lasting 5-6 additional fiscal quarters. The number of economists predicting double-digit official unemployment rates is swelling. Nonetheless, one should be cautious interpreting any forecasted numbers...economic forecasting is no less difficult or uncertain than weather forecasting.
Krugman says we are in an era of "depression economics" where the reigning economic economic ideology of monetarism fails, the ideas of John Maynard Keynes are vindicated, and a New, New Deal is on the agenda -- a 'Deal' now requiring government intervention orders of magnitude greater in size than ever contemplated or enacted by FDR:
"Has anyone else noticed that the current crisis sheds light on one of the great controversies of economic history? A central theme of Keynes's General Theory was the impotence of monetary policy in depression-type conditions. But Milton Friedman and Anna Schwartz, in their magisterial monetary history of the United States, claimed that the Fed could have prevented the Great Depression — a claim that in later, popular writings, including those of Friedman himself, was transmuted into the claim that the Fed caused the Depression.
Now, what the Fed really controlled was the monetary base — currency plus bank reserves The base actually rose during the great slump, which is why it's hard to make the case that the Fed caused the Depression. But arguably the Depression could have been prevented if the Fed had done more — if it had expanded the monetary base faster and done more to rescue banks in trouble.
So here we are, facing a new crisis reminiscent of the 1930s. And this time the Fed has been spectacularly aggressive about expanding the monetary base: And guess what — it doesn't seem to be working. I think the thesis of the Monetary History has just taken a hit.
If Keynes receded in our consciousness over the past few decades, it wasn't mainly because of uninformed criticisms from the right; it was because central bankers seemed to have everything under control. Uncle Alan and his counterparts, by controlling the money supply, could do the job of stabilizing the economy, and Keynesian fiscal policy seemed irrelevant.
Now, Keynes understood the role of monetary policy quite well, and believed that it had been effective in the past. What he argued, however, was that there were situations in which monetary policy could do no more – and that the world economy he lived in was facing such a situation: To be sure, Keynes failed to foresee the postwar rise of the "marginal efficiency of capital" – the way that economic growth combined with inflation would create an environment in which interest rates were high enough in normal times that monetary policy was effective at fighting slumps. Hence the long era in which Keynes didn't seem all that relevant. But his analysis remained as valid as ever, under the right conditions. Those conditions reappeared first in Japan during the 90s; now they're everywhere.
And in the long run, it turns out, Keynes is anything but dead."
Recently armed with the Nobel Prize in Economics for his work in international trade and economies of scale, and widely read as an op-ed columnist for the New York Times, Krugman is accelerating his assault on the commanding heights of the economic orthodoxy of recent decades – supply-side, trickle-down, you-only-need-to-rely-on-Alan-Greenspan economics. Once the liberal pariah among commentators, the recipient of hundreds of death threats for his fearless ridicule of Bush's economics and Iraq war policy even at the height of the President's popularity: he is not alone anymore, having gathered an large and growing league of supporters and collaborators within and without his profession along the way.
Brad Delong, an economist at the University of California,and a former Deputy Secretary of the Treasury in the Clinton Administration, reviewing Krugman's book "The Return of Depression Economics and the Crisis of 2008" – reflects the emerging consensus much closer to Krugman's theoretical position.
"A decade ago, Paul Krugman wrote a little book warning us that economists' triumphalism was misplaced -- that advances in economic knowledge and economic policy had not, after all, banished the prospect of big depressions from the global economy. 'The Return of Depression Economics' sank with barely a ripple. After all, the East Asian financial crisis of 1997-98 – although sharp – was short and quickly cured once the International Monetary Fund realized that the crisis was not the fault of governments and once Senate Republicans allowed the U.S. Treasury to intervene in world markets. Japan's economic problems during its lost-growth decade of the 1990s were, economists asserted, peculiar to itself. And the collapse of the dot-com bubble in 2000-01 brought on not a depression but merely an output decline so mild as to barely warrant the name "recession."
"Now Krugman is back, with a Nobel Prize and a crisis that is orders of magnitude worse than the East Asian one. And he is back with more than a second edition in "The Return of Depression Economics and the Crisis of 2008." He returns with a stronger argument, as the current financial crisis serves as a third example, alongside Japan's lost-growth decade and the East Asian crisis, of 'depression economics.'"
What about the opposing tendencies? Greg Mankiw [former Bush chairman of the council of economic advisers] gives a more orthodox ('monetarist') argument, and it is already being reflected in the economic argumentation behind Republican objections to the very large fiscal stimulus and energetic regulatory reforms that Krugman, fellow Nobel Prize winner Joseph Stiglitz, and their supporters propose as necessary for economic recovery. But, as you will notice in the emphasized sentence below, the force of the "Return of Keynes" assault is having an impact even here:
"Should we worry about government debt and future generations when devising fiscal policies to rescue the economy from it short-run troubles? In particular, should these concerns lead us to a smaller fiscal expansion than we might otherwise pursue? Some economists, such as Dean Baker and Paul Krugman, argue the answer is no. Worries about the budget deficit, in their view, should not deter fiscal expansion. In essence, they say that future generations would be even worse off if we live through a period of depressed aggregate demand, high unemployment, and consequently reduced investment.
"...In my view, these arguments are cogent only under the maintained assumption that there is no good alternative to fiscal expansion....but I continue to believe that there are other choices. Typically, these put monetary policy front and center...... one thing all economists agree on: If there are public investment projects that pay a high rate of return, those are worth paying for, even if it means more borrowing. But that is always true. Even if we were at full employment and there were no possible employment effects of fiscal stimulus, we should undertake public investments that pass a cost-benefit test."
So, almost everyone is on-board for substantial public works, at least! Krugman himself deflects accusations of "Socialism! Socialism!" from the Hysterical Right with promises to someday re-privatize the "too-big-to-fail" enterprises after they have been publicly stabilized. But instead of debating that question, he focuses on the example of FDR's presidency, and of the need for a new, bigger, improved, even more Keynesian, New Deal model of economic management and recovery. Krugman's virtuous defense of Roosevelt's leadership is not uncritical. From a recent op-ed "Franklin Delano Obama":
"Still, how much guidance does the Roosevelt era really offer for today's world? The answer is, a lot. But Barack Obama should learn from F.D.R.'s failures as well as from his achievements: the truth is that the New Deal wasn't as successful in the short run as it was in the long run. And the reason for F.D.R.'s limited short-run success, which almost undid his whole program, was the fact that his economic policies were too cautious.
"About the New Deal's long-run achievements: the institutions F.D.R. built have proved both durable and essential. Indeed, those institutions remain the bedrock of our nation's economic stability. Imagine how much worse the financial crisis would be if the New Deal hadn't insured most bank deposits. Imagine how insecure older Americans would feel right now if Republicans had managed to dismantle Social Security. "
In addition to now weakened monetarist, supply-side voices, there is an economist and writer, Amity Shales, who is very popular on Fox news, and the right wing talk circuits. Her talking points are widely quoted as coming from an "expert on the Depression", and the "failure of Keynesianism" (a la George Will, for example). Shales argues that the Roosevelt New Deal failed because it raised wages thereby lowering demand for labor. Krugman refutes this position in his characteristic concise style:
"[Contrary to Shales, who appears to understand nothing of Keynes]...the effect of wage changes on employment was the subject of a whole chapter in Keynes's General Theory. And what Keynes had to say then is as valid as ever: under depression-type conditions, with short-term interest rates near zero, there's no reason to think that lower wages for all workers – as opposed to lower wages for a particular group of workers – would lead to higher employment.
"Suppose that wages across the US economy had been, say, 20 percent lower than they actually were. You might be tempted to say that this would make hiring workers more attractive. But to a first approximation, prices would also have been 20 percent lower – so the real wage would not have been reduced. So how would lower wages lead to higher demand for labor?
"Well, the real money supply would have been larger – but the normal channel through which this might increase demand, lower interest rates, was blocked by the zero lower bound. Yes....real private sector wealth would have been [slightly] higher, because cash under the mattress (or wherever) was worth more. But on the other hand, real debt burdens would also have been higher, probably exerting a contractionary effect. Overall, there's no good reason to think that lower wages would have helped raise employment.
And once you realize that, the whole argument that FDR prolonged the Depression by sustaining wages evaporates.
In addition to these arguments against a Krugman-style New New Deal stimulus, there are of course a host of disinformation sources primarily focused on preventing the rich from paying any additional taxes – no matter what else may happen. Regardless how successful Krugman may be in his intellectual assault on now failed economic policy and its theoretical underpinnings – moving Congress and the overall public toward the kind of stimulus required in the immediate future is by no means a settled question: in fact making a broad-based political case for it poses the single greatest challenge to the incoming Obama administration. Nonetheless this controversy is as important as any before us, not only for the principles it lays out for economic recovery, but for providing a clear ideological foundation for the rejection of perilous alternatives.
What can, or should, a 21st century socialist or communist think of this debate? From the perspective of workers, especially most African American, Latino, Asian American, and women workers, Depression Economics is not a new concept, of course: $5 in your pocket and $50, or $500, in debt a long-standing condition of life. Krugman's "Depression Economics", however, hopes to provide a sound, renewed theoretical framework, built upon Keynes, to sustain a very active expansion of public sector intervention in the US capitalist economy. Universal health care, expansion of the retirement security programs, expansion of educational opportunity, very large energy and infrastructure investments, stabilization, restructuring and reform of the financial system, salvation and restructuring of the automobile industry, stronger and broader based international economic, security, legal and political institutions – this is a strong dose of socialism by any quantitative standard. A broad campaign as intense and committed as the one that elected Obama will be necessary to achieve it. But does this "return to Keynes", this "depression economics" have deeper implications for the future of society beyond the depression, for a more or less permanent turn toward socialist principles of of economic and social policy?
Socialism, in economic terms, means the expansion of public ownership and/or effective control of production and financial systems critical to economic stability, and progress, in the country or the world at large. In political terms how democratic and broad-based are the interests served by "public" entities becomes the test, and the outcome, of the class struggles of the age. For this writer, the socialist tendency seems thus easy to define: the more broad-based and permanent the benefits of the stimulus and nationalization initiatives, the more democratically accountable the new or reformed regulatory instruments and institutions, the more socialist the trend. The struggle of workers to raise their incomes in proportion to production, to socialize the means of the reproduction of life, and to advance in every way the liberating aspect of creative labor over its alienation and dehumanization, and to expand democratic institutions through which they can exercise political power in their own interests – these are the most important determinants of success in making Keynesian reforms addressing the economic crisis work, AND progress to a more advanced society. Paul Krugman and his collaborators' efforts reestablishing, and strengthening, Keynes over Milton Friedman are a vital ideological step in the fight for restructuring and reform in the wake of this crisis, even though it leaves some important questions as yet unanswered.
* Full employment
* the real mechanisms of financial stabilization
* the real means of passing not only a large Keynesian stimulus, but actually carrying out the unprecedented restructuring of endangered enterprises now too big to fail
* the real means of insuring that workers income truly tracks production and productivity
–to name a few. However just because there are unanswered, or partially answered, questions is no reason for socialists and communists to feel particularly superior: The collapse of the USSR, the relative poverty of Cuba after 50 years of socialism, the radical experimentation in mixed economies underway in China, Vietnam and others; the challenges facing nations with much stronger social democratic institutions than the US – all demonstrate that no one has a monopoly on solutions.
I am not inclined, as are some on the Left, to maintain a "Wall of Jericho" between capitalist and socialist economics. This "wall of Jericho" tendency says, in effect: "Keynes is a bourgeois economist in the sense that his theories were intended to perfect capitalism, and thus any appearances of socializing tendencies are really a deception, are aspects of a false socialism, and serve primarily to perpetuate capitalist exploitation and oppression." The fact that Keynes was a socialist, politically speaking (although NOT a supporter of the Bolshevik Revolution as a model for advanced capitalist countries); that his remedies for capitalism's evils moved inexorably toward greater and greater public intervention and control of the commanding heights of the economies of capitalist countries; that, while the reforms do not eliminate instability, they certainly reduce it – make little impression on the "Wall of Jericho" tendency. And while many in this tendency hasten to deny they are foreclosing the possibility of a peaceful transition to socialism – something that will require an indefinite period of a mixed economics possessing both capitalist and socialist elements – there is a strong ideological bias toward revolutionary social transformation followed by engineering style central planning as certainly the preferred, or more likely, path to socialism. In addition the transformation is seen likely to include a lawless/dictatorial interregnum (a la Lincoln over the slave states, or Lenin over the Tsarist Autocracy), since the private and public institutions of capitalism are seen largely incompatible with those of socialism. Unfortunately, it seems to me that this preference has a mixed historical scorecard, is not wholly relevant to the current context, and often contributes to an anti-reform posture that supplies no useful proposals in place of reform: a tendency that sometimes reflects inattention of serious scientific work, especially in economics; a certain lack of confidence in the materialist conception of history and economic development, and a throwback to dogmatic and futile ideological expressions. Objective conditions are demanding socialization of, in truth – just as Marx predicted, socially produced wealth where its loss becomes destructive to society. Marx himself would be the least surprised that these actions are being proposed independent of affiliation with any "socialist" or "Marxist" ideology. I have confidence that these conditions will continue to evolve and, sooner or later, assist us in overwhelming the mountains of anti-socialist, anti-communist propaganda to rediscover the facts of life. The changes may be either evolutionary, or revolutionary, depending on the maturity and flexibility of public democratic institutions as they restructure to accommodate needed change. But they are going to happen – either the hard way (depression and probably war) or, an easier and more peaceful path – aggressive reform beginning with the Keynesian stimulus vital to recovery.
Any who are hardened against the concept of reforms as somehow ultimately meaningless should take note that the restructuring of the US and world economy resulting from the "very significant" fiscal stimulus and nationalization programs – either launched or under consideration by most world economies and nations – will be vast and profound enough to cause all to catch their breath: None can say that they see exactly where it will end – but all are coming to see that failure to act, to experiment, to be prepared for bold action – poses the greatest peril. The work of the world to come will depend upon public investments made today on a scale never before imagined. Major institutional reforms take years to mature and almost always arise out of crisis, out of systemic failures of institutions of previous eras. They often require social revolution to be implemented. Just as the New Deal institutional reforms helped sustain three generations to higher standards of living than their parents could have dreamed, the forces that shape the institutional reforms arising out of the current crisis may likewise determine the progress and security of the next 50 years. How can our generation, and our youth in particular, be inspired to make the most of this world-changing moment for the futures sake? I submit the communist ideal of "from each according to his ability, to each according to their work" is the best one-line slogan that captures the essence of what the coming changes must achieve. The restoration of labor to its rightful share of national income and wealth, the universal application of equal rights under law, and the call to fulfill each person's highest aspirations and talents are all captured by it.
From a socialist perspective, government has an additional role, not mentioned often in the Krugman debates, of becoming the employer of last resort – not just a lender or bailout or stimulus agent of last resort. In this regard, the expansion of national service proposals contained in the Obama campaign program need to be given more attention in the current range of stimulus proposals than they have so far gotten. In place of, or underneath, many of the transfer payment programs of the federal government, an employer of last resort program would put millions to work in national and regional service instead of paying unemployment benefits. In addition such service, similar to military service, would be rewarded with publicly financed retraining, higher education, health care and retirement support. As Hyman Minsky and the "post-Keynesians" have argued for years, employer-of-last-resort can be structured to be both non-inflationary AND the most potent stabilizing force counteracting the capitalism's inherent destabilizing forces of finance and innovation.
Lastly, even the most progressive reform agenda (and Krugman's Depression Economics is indeed that) may fall apart, or be brought to its knees, by insufficient attention to global imbalances and inequality. Arguably the greatest global stimulus should be directed at those countries with the greatest reserves, not deficits. In this sense, raising demand in China, India, Japan, Brazil, Malaysia, South Africa, not to mention the oil-rich nations, etc would have the greatest positive global impact – both on the emerging nations' workers' income, and on employment in deficit (US, UK, EU) nations – without aggravating dangers of yet another – even bigger – crisis as debt piles up ever higher, and global imbalances become worse. The dangers of insufficient global governance are nowhere more apparent than in the uneven stimulus actions and capabilities across both debtor and reserve nations, and the obstacles to necessary coordination that remain. Calls for a new Bretton Woods system regulating capital flows and exchange rate speculation are now widespread as the chaos from the collapse of the previous financial system proceeds with no end yet in sight.
Working class internationalism – expressed concretely in many more meetings and actions at all levels of workers and their organizations globally to develop a common ground agenda – was never more relevant:
Those who do the work of the world – have reason to be united!
Paul Krugman's Ideological Campaign for the Return of "Depression Economics"
http://www.politicalaffairs.net/article/articleview/7843/
Paul Krugman has launched a determined ideological campaign for the return of the ideas of John Maynard Keynes as the best and most effective framework, for both economic theory and policy, to address the rapidly spreading global financial and economic crisis. For public policy this campaign implies "very significant" public investments in jobs, income, infrastructure, education. By significant is meant surpassing in size, per year, – if you want to return to something greater than zero growth – the expected contraction in the economy from Dec, 2007, the official start of the current Recession, until it ends. The forecasters with the most accurate record in this crisis expect a 4-6 percent contraction lasting 5-6 additional fiscal quarters. The number of economists predicting double-digit official unemployment rates is swelling. Nonetheless, one should be cautious interpreting any forecasted numbers...economic forecasting is no less difficult or uncertain than weather forecasting.
Krugman says we are in an era of "depression economics" where the reigning economic economic ideology of monetarism fails, the ideas of John Maynard Keynes are vindicated, and a New, New Deal is on the agenda -- a 'Deal' now requiring government intervention orders of magnitude greater in size than ever contemplated or enacted by FDR:
"Has anyone else noticed that the current crisis sheds light on one of the great controversies of economic history? A central theme of Keynes's General Theory was the impotence of monetary policy in depression-type conditions. But Milton Friedman and Anna Schwartz, in their magisterial monetary history of the United States, claimed that the Fed could have prevented the Great Depression — a claim that in later, popular writings, including those of Friedman himself, was transmuted into the claim that the Fed caused the Depression.
Now, what the Fed really controlled was the monetary base — currency plus bank reserves The base actually rose during the great slump, which is why it's hard to make the case that the Fed caused the Depression. But arguably the Depression could have been prevented if the Fed had done more — if it had expanded the monetary base faster and done more to rescue banks in trouble.
So here we are, facing a new crisis reminiscent of the 1930s. And this time the Fed has been spectacularly aggressive about expanding the monetary base: And guess what — it doesn't seem to be working. I think the thesis of the Monetary History has just taken a hit.
If Keynes receded in our consciousness over the past few decades, it wasn't mainly because of uninformed criticisms from the right; it was because central bankers seemed to have everything under control. Uncle Alan and his counterparts, by controlling the money supply, could do the job of stabilizing the economy, and Keynesian fiscal policy seemed irrelevant.
Now, Keynes understood the role of monetary policy quite well, and believed that it had been effective in the past. What he argued, however, was that there were situations in which monetary policy could do no more – and that the world economy he lived in was facing such a situation: To be sure, Keynes failed to foresee the postwar rise of the "marginal efficiency of capital" – the way that economic growth combined with inflation would create an environment in which interest rates were high enough in normal times that monetary policy was effective at fighting slumps. Hence the long era in which Keynes didn't seem all that relevant. But his analysis remained as valid as ever, under the right conditions. Those conditions reappeared first in Japan during the 90s; now they're everywhere.
And in the long run, it turns out, Keynes is anything but dead."
Recently armed with the Nobel Prize in Economics for his work in international trade and economies of scale, and widely read as an op-ed columnist for the New York Times, Krugman is accelerating his assault on the commanding heights of the economic orthodoxy of recent decades – supply-side, trickle-down, you-only-need-to-rely-on-Alan-Greenspan economics. Once the liberal pariah among commentators, the recipient of hundreds of death threats for his fearless ridicule of Bush's economics and Iraq war policy even at the height of the President's popularity: he is not alone anymore, having gathered an large and growing league of supporters and collaborators within and without his profession along the way.
Brad Delong, an economist at the University of California,and a former Deputy Secretary of the Treasury in the Clinton Administration, reviewing Krugman's book "The Return of Depression Economics and the Crisis of 2008" – reflects the emerging consensus much closer to Krugman's theoretical position.
"A decade ago, Paul Krugman wrote a little book warning us that economists' triumphalism was misplaced -- that advances in economic knowledge and economic policy had not, after all, banished the prospect of big depressions from the global economy. 'The Return of Depression Economics' sank with barely a ripple. After all, the East Asian financial crisis of 1997-98 – although sharp – was short and quickly cured once the International Monetary Fund realized that the crisis was not the fault of governments and once Senate Republicans allowed the U.S. Treasury to intervene in world markets. Japan's economic problems during its lost-growth decade of the 1990s were, economists asserted, peculiar to itself. And the collapse of the dot-com bubble in 2000-01 brought on not a depression but merely an output decline so mild as to barely warrant the name "recession."
"Now Krugman is back, with a Nobel Prize and a crisis that is orders of magnitude worse than the East Asian one. And he is back with more than a second edition in "The Return of Depression Economics and the Crisis of 2008." He returns with a stronger argument, as the current financial crisis serves as a third example, alongside Japan's lost-growth decade and the East Asian crisis, of 'depression economics.'"
What about the opposing tendencies? Greg Mankiw [former Bush chairman of the council of economic advisers] gives a more orthodox ('monetarist') argument, and it is already being reflected in the economic argumentation behind Republican objections to the very large fiscal stimulus and energetic regulatory reforms that Krugman, fellow Nobel Prize winner Joseph Stiglitz, and their supporters propose as necessary for economic recovery. But, as you will notice in the emphasized sentence below, the force of the "Return of Keynes" assault is having an impact even here:
"Should we worry about government debt and future generations when devising fiscal policies to rescue the economy from it short-run troubles? In particular, should these concerns lead us to a smaller fiscal expansion than we might otherwise pursue? Some economists, such as Dean Baker and Paul Krugman, argue the answer is no. Worries about the budget deficit, in their view, should not deter fiscal expansion. In essence, they say that future generations would be even worse off if we live through a period of depressed aggregate demand, high unemployment, and consequently reduced investment.
"...In my view, these arguments are cogent only under the maintained assumption that there is no good alternative to fiscal expansion....but I continue to believe that there are other choices. Typically, these put monetary policy front and center...... one thing all economists agree on: If there are public investment projects that pay a high rate of return, those are worth paying for, even if it means more borrowing. But that is always true. Even if we were at full employment and there were no possible employment effects of fiscal stimulus, we should undertake public investments that pass a cost-benefit test."
So, almost everyone is on-board for substantial public works, at least! Krugman himself deflects accusations of "Socialism! Socialism!" from the Hysterical Right with promises to someday re-privatize the "too-big-to-fail" enterprises after they have been publicly stabilized. But instead of debating that question, he focuses on the example of FDR's presidency, and of the need for a new, bigger, improved, even more Keynesian, New Deal model of economic management and recovery. Krugman's virtuous defense of Roosevelt's leadership is not uncritical. From a recent op-ed "Franklin Delano Obama":
"Still, how much guidance does the Roosevelt era really offer for today's world? The answer is, a lot. But Barack Obama should learn from F.D.R.'s failures as well as from his achievements: the truth is that the New Deal wasn't as successful in the short run as it was in the long run. And the reason for F.D.R.'s limited short-run success, which almost undid his whole program, was the fact that his economic policies were too cautious.
"About the New Deal's long-run achievements: the institutions F.D.R. built have proved both durable and essential. Indeed, those institutions remain the bedrock of our nation's economic stability. Imagine how much worse the financial crisis would be if the New Deal hadn't insured most bank deposits. Imagine how insecure older Americans would feel right now if Republicans had managed to dismantle Social Security. "
In addition to now weakened monetarist, supply-side voices, there is an economist and writer, Amity Shales, who is very popular on Fox news, and the right wing talk circuits. Her talking points are widely quoted as coming from an "expert on the Depression", and the "failure of Keynesianism" (a la George Will, for example). Shales argues that the Roosevelt New Deal failed because it raised wages thereby lowering demand for labor. Krugman refutes this position in his characteristic concise style:
"[Contrary to Shales, who appears to understand nothing of Keynes]...the effect of wage changes on employment was the subject of a whole chapter in Keynes's General Theory. And what Keynes had to say then is as valid as ever: under depression-type conditions, with short-term interest rates near zero, there's no reason to think that lower wages for all workers – as opposed to lower wages for a particular group of workers – would lead to higher employment.
"Suppose that wages across the US economy had been, say, 20 percent lower than they actually were. You might be tempted to say that this would make hiring workers more attractive. But to a first approximation, prices would also have been 20 percent lower – so the real wage would not have been reduced. So how would lower wages lead to higher demand for labor?
"Well, the real money supply would have been larger – but the normal channel through which this might increase demand, lower interest rates, was blocked by the zero lower bound. Yes....real private sector wealth would have been [slightly] higher, because cash under the mattress (or wherever) was worth more. But on the other hand, real debt burdens would also have been higher, probably exerting a contractionary effect. Overall, there's no good reason to think that lower wages would have helped raise employment.
And once you realize that, the whole argument that FDR prolonged the Depression by sustaining wages evaporates.
In addition to these arguments against a Krugman-style New New Deal stimulus, there are of course a host of disinformation sources primarily focused on preventing the rich from paying any additional taxes – no matter what else may happen. Regardless how successful Krugman may be in his intellectual assault on now failed economic policy and its theoretical underpinnings – moving Congress and the overall public toward the kind of stimulus required in the immediate future is by no means a settled question: in fact making a broad-based political case for it poses the single greatest challenge to the incoming Obama administration. Nonetheless this controversy is as important as any before us, not only for the principles it lays out for economic recovery, but for providing a clear ideological foundation for the rejection of perilous alternatives.
What can, or should, a 21st century socialist or communist think of this debate? From the perspective of workers, especially most African American, Latino, Asian American, and women workers, Depression Economics is not a new concept, of course: $5 in your pocket and $50, or $500, in debt a long-standing condition of life. Krugman's "Depression Economics", however, hopes to provide a sound, renewed theoretical framework, built upon Keynes, to sustain a very active expansion of public sector intervention in the US capitalist economy. Universal health care, expansion of the retirement security programs, expansion of educational opportunity, very large energy and infrastructure investments, stabilization, restructuring and reform of the financial system, salvation and restructuring of the automobile industry, stronger and broader based international economic, security, legal and political institutions – this is a strong dose of socialism by any quantitative standard. A broad campaign as intense and committed as the one that elected Obama will be necessary to achieve it. But does this "return to Keynes", this "depression economics" have deeper implications for the future of society beyond the depression, for a more or less permanent turn toward socialist principles of of economic and social policy?
Socialism, in economic terms, means the expansion of public ownership and/or effective control of production and financial systems critical to economic stability, and progress, in the country or the world at large. In political terms how democratic and broad-based are the interests served by "public" entities becomes the test, and the outcome, of the class struggles of the age. For this writer, the socialist tendency seems thus easy to define: the more broad-based and permanent the benefits of the stimulus and nationalization initiatives, the more democratically accountable the new or reformed regulatory instruments and institutions, the more socialist the trend. The struggle of workers to raise their incomes in proportion to production, to socialize the means of the reproduction of life, and to advance in every way the liberating aspect of creative labor over its alienation and dehumanization, and to expand democratic institutions through which they can exercise political power in their own interests – these are the most important determinants of success in making Keynesian reforms addressing the economic crisis work, AND progress to a more advanced society. Paul Krugman and his collaborators' efforts reestablishing, and strengthening, Keynes over Milton Friedman are a vital ideological step in the fight for restructuring and reform in the wake of this crisis, even though it leaves some important questions as yet unanswered.
* Full employment
* the real mechanisms of financial stabilization
* the real means of passing not only a large Keynesian stimulus, but actually carrying out the unprecedented restructuring of endangered enterprises now too big to fail
* the real means of insuring that workers income truly tracks production and productivity
–to name a few. However just because there are unanswered, or partially answered, questions is no reason for socialists and communists to feel particularly superior: The collapse of the USSR, the relative poverty of Cuba after 50 years of socialism, the radical experimentation in mixed economies underway in China, Vietnam and others; the challenges facing nations with much stronger social democratic institutions than the US – all demonstrate that no one has a monopoly on solutions.
I am not inclined, as are some on the Left, to maintain a "Wall of Jericho" between capitalist and socialist economics. This "wall of Jericho" tendency says, in effect: "Keynes is a bourgeois economist in the sense that his theories were intended to perfect capitalism, and thus any appearances of socializing tendencies are really a deception, are aspects of a false socialism, and serve primarily to perpetuate capitalist exploitation and oppression." The fact that Keynes was a socialist, politically speaking (although NOT a supporter of the Bolshevik Revolution as a model for advanced capitalist countries); that his remedies for capitalism's evils moved inexorably toward greater and greater public intervention and control of the commanding heights of the economies of capitalist countries; that, while the reforms do not eliminate instability, they certainly reduce it – make little impression on the "Wall of Jericho" tendency. And while many in this tendency hasten to deny they are foreclosing the possibility of a peaceful transition to socialism – something that will require an indefinite period of a mixed economics possessing both capitalist and socialist elements – there is a strong ideological bias toward revolutionary social transformation followed by engineering style central planning as certainly the preferred, or more likely, path to socialism. In addition the transformation is seen likely to include a lawless/dictatorial interregnum (a la Lincoln over the slave states, or Lenin over the Tsarist Autocracy), since the private and public institutions of capitalism are seen largely incompatible with those of socialism. Unfortunately, it seems to me that this preference has a mixed historical scorecard, is not wholly relevant to the current context, and often contributes to an anti-reform posture that supplies no useful proposals in place of reform: a tendency that sometimes reflects inattention of serious scientific work, especially in economics; a certain lack of confidence in the materialist conception of history and economic development, and a throwback to dogmatic and futile ideological expressions. Objective conditions are demanding socialization of, in truth – just as Marx predicted, socially produced wealth where its loss becomes destructive to society. Marx himself would be the least surprised that these actions are being proposed independent of affiliation with any "socialist" or "Marxist" ideology. I have confidence that these conditions will continue to evolve and, sooner or later, assist us in overwhelming the mountains of anti-socialist, anti-communist propaganda to rediscover the facts of life. The changes may be either evolutionary, or revolutionary, depending on the maturity and flexibility of public democratic institutions as they restructure to accommodate needed change. But they are going to happen – either the hard way (depression and probably war) or, an easier and more peaceful path – aggressive reform beginning with the Keynesian stimulus vital to recovery.
Any who are hardened against the concept of reforms as somehow ultimately meaningless should take note that the restructuring of the US and world economy resulting from the "very significant" fiscal stimulus and nationalization programs – either launched or under consideration by most world economies and nations – will be vast and profound enough to cause all to catch their breath: None can say that they see exactly where it will end – but all are coming to see that failure to act, to experiment, to be prepared for bold action – poses the greatest peril. The work of the world to come will depend upon public investments made today on a scale never before imagined. Major institutional reforms take years to mature and almost always arise out of crisis, out of systemic failures of institutions of previous eras. They often require social revolution to be implemented. Just as the New Deal institutional reforms helped sustain three generations to higher standards of living than their parents could have dreamed, the forces that shape the institutional reforms arising out of the current crisis may likewise determine the progress and security of the next 50 years. How can our generation, and our youth in particular, be inspired to make the most of this world-changing moment for the futures sake? I submit the communist ideal of "from each according to his ability, to each according to their work" is the best one-line slogan that captures the essence of what the coming changes must achieve. The restoration of labor to its rightful share of national income and wealth, the universal application of equal rights under law, and the call to fulfill each person's highest aspirations and talents are all captured by it.
From a socialist perspective, government has an additional role, not mentioned often in the Krugman debates, of becoming the employer of last resort – not just a lender or bailout or stimulus agent of last resort. In this regard, the expansion of national service proposals contained in the Obama campaign program need to be given more attention in the current range of stimulus proposals than they have so far gotten. In place of, or underneath, many of the transfer payment programs of the federal government, an employer of last resort program would put millions to work in national and regional service instead of paying unemployment benefits. In addition such service, similar to military service, would be rewarded with publicly financed retraining, higher education, health care and retirement support. As Hyman Minsky and the "post-Keynesians" have argued for years, employer-of-last-resort can be structured to be both non-inflationary AND the most potent stabilizing force counteracting the capitalism's inherent destabilizing forces of finance and innovation.
Lastly, even the most progressive reform agenda (and Krugman's Depression Economics is indeed that) may fall apart, or be brought to its knees, by insufficient attention to global imbalances and inequality. Arguably the greatest global stimulus should be directed at those countries with the greatest reserves, not deficits. In this sense, raising demand in China, India, Japan, Brazil, Malaysia, South Africa, not to mention the oil-rich nations, etc would have the greatest positive global impact – both on the emerging nations' workers' income, and on employment in deficit (US, UK, EU) nations – without aggravating dangers of yet another – even bigger – crisis as debt piles up ever higher, and global imbalances become worse. The dangers of insufficient global governance are nowhere more apparent than in the uneven stimulus actions and capabilities across both debtor and reserve nations, and the obstacles to necessary coordination that remain. Calls for a new Bretton Woods system regulating capital flows and exchange rate speculation are now widespread as the chaos from the collapse of the previous financial system proceeds with no end yet in sight.
Working class internationalism – expressed concretely in many more meetings and actions at all levels of workers and their organizations globally to develop a common ground agenda – was never more relevant:
Those who do the work of the world – have reason to be united!