Wednesday, October 29, 2008

Keynesianism is Centrist - Isn't It?

Last night Centre College students had a good debate. A College Democrat represented Sen. Obama's position, and a College Republican represented Sen. McCain's position. Another student, from our Bonner Scholars program, moderated, presenting questions submitted by the student body. Everyone did a fine job, and the whole debate was more informative than the candidate debates.

I was surprised by one exchange that went beyond anything I have heard from the actual presidential campaigns. The Democrat argued that Republicans still believed, as Pres. Hoover did, that the market should be left alone to settle recessions without government interference. In response, the Republican argued that when FDR raised taxes and created government jobs in order to give consumers money to stimulate the economy, he was the one who wrecked the economy.

I have heard informed opinion that the New Deal's Keynesian policies did not end the Depression by themselves -- World War II so stimulated production that people were put back to work (though much of that was also through government spending on war goods). Still, I thought it was taken for granted now that the Republican laissez-faire response to the Depression made the problem much worse, whereas Keynesian stimulus approaches saved the economy - indeed, saved capitalism.

Now I am not holding the Republican Party or Sen. McCain responsible for the views of one 18 year old College Republican. I expect, though, that he got this idea from a discourse circulating in Republican circles still -- or perhaps again. So, dear readers, are "We are all Keynesians now?"

10 comments:

halifax said...

As you might guess, I'm not a Keynesian (in part, because I'm not an anythingian). Nonetheless, the perception that Hoover fiddled while the US burned is a false one, while the notion that FDR's potted Keynesianism pulled the US out of depression is equally absurd. (Just because a lot of smart people believe something doesn't make it so. I would check with a few more economists and few less historians.)

In fact, Hoover initiated program after program to address the situation. He was applauded here by the AFofL, of all groups: "The President's conference [with industry] has given industrial leaders a new sense of their responsibilities. . . . Never before have they been called upon to act together . . . in earlier recessions they have acted individually to protect their own interests and . . . have intensified depressions." Hoover established public works programs (which would be later copied in gargantuan fashion by FDR), created the farm subsidy program, increased the supply of money, and passed severely protectionist trade measures. He accomplished all of these things before 1931, and yet 1931 saw the depression worsen (in part because of the dire situation in Europe).

FDR, ironically enough, ran (in part) on balancing the budget in 1932, though he was certainly not averse to falsely castigating Hoover for doing nothing. Nonetheless, and despite FDR's own dirigisme, the US economy in 1938 was in as bad or worse shape than when FDR took over, and unemployment was still running at nearly 20%, despite his alphabet soup list of federal programs. How long does Keynsianism take to work its magic after all? Perhaps, a small dollop of Keynes and a large scoop of the warfare state goes a long way.

So, whether it would have 'worked’ or not (and I'm dubious), laissez-faireism was not Hoover's chosen response to the economic crisis, and, whatever else you want to say about Keynesianism, it certainly didn't work either in any meaningful sense of the term.

Michael Kruse said...

Halifax took some of my thunder.

Hoover believed in what he called volunteerism but he did act. He expanded government projects to create jobs, he increased the top marginal tax rate from 25% to 63%, repatriating Mexicans and Mexican-Americans, and passed the Hawley-Smoot Tariff act that raised tariffs on thousands of imported goods. He also tried a variety of financial tactics to improve liquidity and lending. Roosevelt’s actions were actually more of an expansion of Hoover’s actions, not a radical departure from them. (Wikipedia actually has a good synopsis of Hoover’s actions under his bio.)

Roosevelt turned to Keyensian economics, which essentially viewed saving as hoarding. The idea was to get money into the marketplace. Thus, top marginal tax rates were increased until they were over 90% by FDR’s death. Money was redistributed from the “hoarders” to those who would spend it. Meanwhile, Roosevelt used a variety of tariffs and subsidies to protect American firms from international competition, he created industry cartels specifically designed to prevent firms from driving prices below certain minimums, and he spawned powerful labor unions that kept labor costs unrealistically high.

Savings on deposit is critical in providing capital for business expansion, but FDR policies did all they could to thwart saving. That created needlessly high capital costs and low liquidity, thus hampering business expansion. Exorbitant tax rates discouraged business expansion (Why take risks if you only keep 10-20 cents on the dollar earned?) Wage and price controls made it counter productive to innovate and update industrial capacity. In response, industry simply ran their physical plants well beyond their useful lives. Productivity through technological innovation was halted, the industrial base was allowed to deteriorate, and few new private sector jobs were created. Thus, the unemployment rates of about 10% or higher all through the 1930s.

World War II did two things. It compelled people to save, and it radically improved and expanded the industrial base through war time production efforts. By the end of WWII people were saving up to 25% of income because there was so little that could be purchased. At the end of WWII, you had a large amount of savings on deposit (thus low costs of capital), you had a state of the art industrial base, and you had an expansive well-trained workforce (this relatively cheaper labor) ready to get about the business of building peacetime lives and communities.

Neither Hoover or Roosevelt are models to imitate.

Gruntled said...

But both were Keynesians of a sort -- thus proving my main point.

Michael Kruse said...
This comment has been removed by the author.
Michael Kruse said...

I'm confused. I took the point of your article to be that Keynesian economics is centrist and therefore a good thing. Halifax and I are claiming that Keynesian economics deepened and worsened the depression.

So yes, Hoover and Roosevelt were Keynesian, but it was a disaster. Therefore, I don't know what it means to say that Keynesian economics is centrist but Keynesian economics should be avoided like the plague. :-) It is not a good thing. (Note: laissez-faire or socialism are not the default alternatives.

If we elect Obama and the Dems, then yes we are becoming more Keynesian in our government (i.e., increased taxes, protectionism, redistributionism, government expansion, expansion of organized labor). That is a bad omen.

Gruntled said...

Fair enough -- I had two points. One is that Keynesianism the consensus position now. The other is that that is a good thing. The first (which I think this discussion supports) does not entail the second. On the other hand, if that is the consensus, then the practical options consist of arguing about how much Keynesian intervention the next administration will engage in; facing the realist possibilities is centrist in the good sense.

halifax said...

I would still say that we're not all Keynesians in the strict sense (where were the tax increases and program slashing when the economy was growing, after all?), but, insofar as the two major parties now feel responsible for taking governmental action whenever there are economic difficulties of any sort, then both parties are Keynesian. And, insofar as the American public seems to demand that the government do something whenever a problem exists, I suppose that you could call them Keynsians, too (or, as Senator Gramm correctly pointed out, you could call them spoiled whiners;)). None of this suggests that it (Keynesian economic policy) works, but it might bring some calm to the otherwise fevered brows of talking heads, academics, and people who watch a lot of television.

Corky said...

"A free economy cannot successfully function under the constant attacks of a coercive police power. Investment is not decided according to some mystical "opportunity." It is determined by the prospects for profit and the prospects of keeping that profit." Murray Robard (1947)

He saw the problems the new deal created and addressed them.

I think if Keynesian is centrist, it would be because a large percentage of the population doesn't pay taxes yet expects money back from a pot to which they do not contribute.

So you may be right that it has become the default or centrist position, but I ague that is not a good thing.

Others who are more economically minded might want to check out this website

http://mises.org/story/2950#

Gruntled said...

Everyone pays taxes. We all pay the regressive taxes, and everyone with a job pays the withheld taxes. Income tax is only one part of the mix.

Corky said...

True, but I'd love to only pay sales tax, gas tax, and other fixed taxes, but not have to pay income taxes either. When I look at what I thought I was making over the past years and what in reality I was bringing home to then again pay sales taxes and capital gains taxes, etc I become more of a "flat tax" along the lines of "fair tax" person. I believe this motivates people to earn more without the expectation of penalties for their efforts.

Redistribution of wealth through taxes as you posted on an earlier blog was not my understanding of the purpose of taxes. I don't mind helping for the greater good, elementary schools, highways, the military etc. Things the bulk of us all share in common.

But increasing income taxes, taking peoples' hard earned money through coercion and then redistributing it to a politically favored group only increases resentment and mutiny because it is quite simply robbery.