This is a critical moment for economic policy in the industrialized countries. After a year and a half of emergency rescue, with large fiscal deficits and rock-bottom interest rates, governments are beginning to pull back. Especially in countries with large current account deficits, stimulus spending is being withdrawn, and central banks are under pressure to begin raising rates and tightening money. The threat of deflation and cascading insolvencies in the financial system are so yesterday; today’s threat is said to be inflation and sovereign default.
If you survey the center-to-left economics blogs, including this one—economists who see the world at least in part through Keynesian eyes—you will find howls of protest. It is simply irrational, we say, to allow this slump to run its course. There is no threat of inflation at all, which is actually a problem, since a bit of inflation would be medicine against effectively high nominal interest rates at the zero lower bound. And every indication is that the recovery under way owes its feeble pulse to the lingering effects of last year’s stimulus.
But is this just a problem of economic analysis? Is it only that New, Post and other Keynesians haven’t been persuasive enough? Does economic argument and evidence drive policy?
In a sense yes: those who make the decisions summon economic arguments to justify their actions. But who gets to make the decisions and what arguments they find appealing is not the outcome of academic seminars. What got us into this mess in the first place, and what now threatens to throw us back into the maelstrom, is the political hegemony of the “finance perspective”, the interests and outlook of those whose main concern is maximizing (and now simply protecting) the value of their financial assets. . . .
. . . economic orthodoxy is regaining control over policy because it reflects the outlook of those who occupy the upper reaches of government and business.
Up to this point, the Great Economic Event we are passing through has not caused even a hint of political realignment, and that is why policy is returning to the old normal.
Dorman identifies the "finance perspective" with the traditional concept of the rentier class. I think this wrong in an important way: the actual rentiers are being taken for a ride by a "finance class" of financial intermediary managers and the new class of corporate CEOs. But, still, Dorman's point, which is worth highlighting on this blog, is the absence of a political realignment, and its role in pressing the country and the world back toward the status quo ante.
This blog has been searching the horizon for the beginning of a political realignment from its beginning, and hasn't spotted it, yet, though some pretty fierce political storms have come and gone.
I fault the Keynesians for habitually denying what Dorman tepidly acknowledges here.
Still, he doesn't go far enough, doesn't acknowledge whole dimensions of the conflict, let alone measure the depth in context.
One dimension that he doesn't acknowledge is Time; ordinarily, progress through time creates a conflict between those, who lend money to make money, and those, who borrow money to make money, not to mention the conflict between those who labor to make money, and those, who dominate those who labor, to make money.
We are at the end of an Era, an economic Epoch -- an aspect of economics the Keynesians buried with Schumpeter, and the New Keynesians ostracized in Minsky. In the words of "my hero" Sterling Newberry,
"Our present is defined not by what we hope for, but by how we justify a position of wealth and privilege which we are no longer earning, but are determined to keep."
You fault the conservatives among the financial class for failing to see that we are all in the same leaky boat. Whether from hopeful idealism or from the naivete of Pangloss, that attitude leads to the same eyes-wide-shut blindness.
We are not in the same boat. The finance class (which includes the social class of actual and aspiring CEOs, who run our major corporations) have been throwing more and more of us overboard for some time.
The dominant core of American Finance has been evolving [metaphor switch] from farmer/shepherd to predator to parasite, and may well transition into scavenger, without hesitation. (The rentier class does not drive the politics; they go along, because they think they are in on the con. Just like Madoff investors, who thought Madoff was a crook, their crook, they will try to protect the ability of the Financial Class to steal on their behalf.)
And, we are not part of a generic, past-less, future-less economy. The Economy does not tend toward some general, generic, structure-less equilibrium, guided by Walrasian tatonnement. The Economy finds its stability in disequilibrium, like a bicycle in motion. It can go on for a long-time, growing pleasantly, in a particular pattern or paradigm of disequilibrium, but not forever. Eventually, the bases for stable disequilibrium are exhausted, and structural change is required.
We are at a point in time, when structural change, deep and broad and massive, is clearly and urgently required. Climate change, peak oil, pointless and unbelievably costly wars without end, the descent of the American economy into negative savings/disinvestment -- the signals are clear, frequent and at ear-splitting volume.
Again, the Keynesians, new and old, stand by, mutely, dumbly. This is an aspect of the situation, they mostly refuse to acknowledge. Krugman will call for fiscal stimulus, but not complete the argument, by saying clearly how public spending should be focused on re-structuring the economy. The argument becomes diffuse, as conservatives opposed to re-structuring or wanting to accelerate the strip-mining of the middle-class, propose massive tax-cutting. And, why not, if stimulus is just generic spending, if the Federal deficit is something to be considered only later, . . .
In one sense, Dorman is right: the ideas of the econ-Left have no traction, because interests drive policy. Here's the thing: to have traction, you have to have friction, you have to come in contact with an opposed surface.
But, the econ-Left, in its argument and ideation, habitually abstracts away from Interests. The Keynesian insistence that it is a "technical problem" -- which in 1936 was actually very helpful in dispelling the paralysis of analysis of "its complicated" coming from the institutionalists as well as the nonsense of the classical know-nothings -- has become the doctrine of an establishment Technocracy, a priesthood, who find esoteric obscurity more useful than clarity.
Economic ideas can have traction. They can have traction, when they connect with Interests. Economic ideas that abstract away from the particular reality of the immediate crisis and historic moment, that fail to acknowledge opposed interests, because it requires acknowledging that some Members in Good Standing of the Club are working for the devil-incarnate -- well, no one should be surprised that an unwillingness to describe current policy and its intended and likely consequences accurately leads to irrelevance.
Doctor Why says this more succinctly than I:
The orthodoxy believes that economic adjustment should happen in the labor market (lower wages), rather than in the credit markets (lower real interest rates) or through fiscal policy (high budget deficit and more progressive taxation) - which is of course a very convenient view for the powers that be.
So if Keynesians really want to influence policy - rather than just blog about it - they have to show that the economic and political cost of the labor-market adjustment is going to be unacceptable. Unfortunately, right now such an argument cannot be convincingly made from a purely cyclical perspective (it requires a more sophisticated structural view), and therefore some sort of anti-Keynesian backlash seems to be inevitable.
Taking a more global perspective, the status quo ante entails some chronic imbalances of trade, investment and funds flow, which are simply unsustainable. They were always unsustainable "in the long run", but highly beneficial in "the short run", especially to the financial sector and to those in charge of multinational corporations; now, the long run has run out. The American powers-that-be are choosing stagnation, as the least bad policy, because the financialization of the American economy rests on those chronic imbalances of trade and funds flow, and, maybe, that chronic imbalance can be managed, and the wealth it created, preserved, for a bit longer, provided the losses are crammed-down on labor and the middle classes.