A New Year's Keynesian Wish: Advice to Clinton in the Aftermath of November 1994
Wray, L. Randall, Journal of Economic Issues
With the "resounding" GOP victory in November 1994, political pundits advised President Clinton to move further right and to embrace economic policies that failed repeatedly over the past two decades. They urged Clinton to denounce purportedly disastrous "Keynesian" policies traditionally associated with--and supposedly dominating the policy of--Democratic administrations. I will offer an alternative view, arguing that what is seen as "Keynesian" policy was neither consistent with Keynesian theory nor did it dominate policy formation. I will argue, however, that some postwar policy can be legitimately labeled Keynesian and indeed was successful and that Clinton should return to policy informed by Keynesian theory.
During the bastardization of Keynes's General Theory (GT), Keynesianism became identified with aggregate demand fine-tuning through countercyclical budget deficits/surpluses ("fiscal policy") and manipulation of interest rates ("monetary policy"). This view was enshrined in the textbooks on which we were teethed. This sort of Keynesianism is dead, indeed, and was dead long before the Republican "contract on America."(1) However, this was the bastard progeny of Paul Samuelson and bore little resemblance to Keynes's prescriptions. I will not try to clear Keynes of the paternity of fine-tuning, as even a quick reading of Chapter 24 of the GT should make clear that bastard Keynesian policy was a conservative alternative to Keynes's revolutionary thinking. Keynes argued: "The outstanding faults of the economic society in which we live are its failure to provide for full employment and its arbitrary and inequitable distribution of wealth and incomes."(2) He went on to argue for "euthanasia of the rentier" through permanent low-interest rate policy; for income redistribution to raise aggregate demand and reduce inequality that impede economic growth; for other policy to "stimulate the average propensity to consume"; for state intervention to establish "rules and limitations" that would still provide sufficient reward to valuable human activities which require the motive of money-making," albeit at considerably lower prospective pay-offs with the state determining the "basic rate of reward to those who own" the means of production; and for "depriving capital of its scarcity-value within one or two generations" through state policy that would include "a comprehensive socialisation of investment" and state determination of "the aggregate amount of resources devoted to augmenting the instruments" of production. That is not bastard Keynesianism.
Keynes wrote specific policy recommendations on many occasions, and while these showed great respect for individual freedom and private initiative, they also were imbued with a sense of social duty, were institutionally informed, and were above all pragmatic. If there was an institutional basis to Keynesian policy, then there is no reason to believe Keynes's policy recommendations are necessarily relevant today. It is more important to use Keynes's theory to formulate policy relevant to monetary production economies at the close of the century. Even if bastard Keynesian fine-tuning were truly Keynesian, and even if it had been tried in the 1960s and had failed, that would be irrelevant to the usefulness of Keynesian theory and policy today. However, Keynes's claim still rings true that the two outstanding faults of capitalism are the gross inequalities and the inability to provide for full employment; Keynes's GT shows why capitalist economies tend to generate these failings, and his theory provides the structure for a solution. Neither bastard Keynesian fine-tuning nor the invisible hand waving of free market idealogues is appropriate for our present circumstances. Neither is the GOP "contract," informed by the tired policies of monetarism and supply-side economics that failed in the last decade, going to stem the disintegration of our society which, as Wallace Peterson has documented, began about 1973 [Peterson 1994]. …