Thursday, July 28, 2011

John Maynard Keynes Was Laid To Rest This Week

Whatever the outcome of Thursday's projected House vote on Speaker Boehner's debt plan, this process has already ended the political life of one prominent member of the Washington establishment: John Maynard Keynes.

True, Keynes died in 1946. But his ghost hovered over America's economic debate until pretty much Monday night. In their ostensibly dueling speeches, both President Obama and House Speaker Boehner embraced the language of "austerity" and performed an unwitting exorcism.

In brief, Keynes is the man whose ideas led to 2009's stimulus policy. Looking at the problems of the 1930s, he helped develop FDR's "New Deal" concept that you spend your way out of a recession. [see: Pres. Obama Pushes "Serious Cuts" In His Weekly Address]

Anti-Keynesians have argued that these policies don't create real growth, but only the illusion of growth, and lead to future bubbles. Some recent anti-Keynesians have argued that his policies were all well and good in the relatively non-litigious 1930s, but that modern society means virtually nothing is "shovel-ready." Consequently, they argue, the cost of matching the impact of - say - FDR's programs would now be ruinously expensive. That, they say, is why the when you see signs advertising the good works of the American Reinvestment and Recovery Act (the stimulus' official name) it is not at the site of a new Hoover Dam, but on fairly trivial things like extra paintwork for Amtrak stations.

Whatever the validity of their arguments, for now the anti-Keynesians have prevailed. Part of the reason is optics: at a time when citizens are cutting back, it looks good to engage in a bit of sympathy rhetoric about Washington "tightening its belt." On Monday night even House Minority Leader Nancy Pelosi - for so long demonized by the right as the smiling face of big government - released a pro-austerity statement. That's a clear sign which way the wind is blowing.

If you look closely at Pelosi's austerity-lauding you'll see the types of pressures being brought to bear. Her full phrase was: "It is clear we must enter an age of austerity; to reduce the deficit through shared sacrifice." The last two words are important: "shared sacrifice." They were echoed in President Obama's Monday night address when he suggested raising taxes on the rich, asking "millionaires and billionaires... to share in the sacrifice everyone else has to make." In other words, embracing an austerity-laden tone did not mean they were also embracing the tax-cutting agenda that has lately been associated with it. They were trying to create a "we're all in this together" attitude, that could pave the way for increased revenues from the "corporate jet owners" the President has consistently called out in recent speeches.

However, this tax-the-rich suggestion has gone nowhere in the subsequent debate. Indeed, of the bills lined up in the House and Senate right now, neither of them goes anywhere near a tax increase. The language of austerity has so far benefited the Republican position, which is all cuts and no taxes.

As the language has shifted right, so has the overall tenor of the situation. When President Obama used to meet with British Prime Minister David Cameron, for all their apparent bonhomie, a dark cloud hung over their relationship. It was the cloud of economic policy: Cameron had embraced the opposite approach from the US, and had heralded "austerity" in Britain. This has not so far had a significantly positive impact on the country's GDP or employment ratings, but it has propped up its AAA credit ratings, which were under threat before the moves. As the debt debate has dragged on, President Obama has increasingly found himself facing a comparable circumstance with regards to the credit agencies, and seems set to make similar choices. A second stimulus package now seems as remote as funding for a mission to mars.

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