The faux left trinity
There seems to be a growing feud between so called fresh and salt water economists – the fresh being hard defenders of laissez-faire capitalism and the salt being the somewhat less adamant who usually refer to themselves as “New Keynesians”. Here’s ocean traveler Paul Krugman:
“(Fresh water economists) declared final victory over all things Keynesian in the 1970s, and the closed minds of their followers were such that they didn’t even notice the revival of Keynesianism that took place over the three decades that followed.”
“(I)f you’ve reached the point where you don’t pay attention to anything that might disturb your orthodoxy, you’re not doing science, you’re not even pursuing a discipline. All you’re doing is perpetuating a smug, closed-minded sect.”
And fellow sailor Brad DeLong:
“But if you look at the current state of the Chicago School, it seems to me that, among that group of economists at least, it is definitely not a science…. Moreover, it is not even a discipline.”
Regarding this feud, I think we need to keep in mind it’s purely within the family. It’s remarkably similar in fact to the feuds going on between the democrats and republicans and between union leaders and management. There’s little of real importance at stake because the fundamental differences aren’t large. All three, the democrats, union leaders, and “New Keynesian” economists need to be lumped together and branded for what they are: a faux left trinity, each posing as defenders of a more egalitarian society versus the forces of unbridled capitalism while in actuality remaining firmly embedded within the corrupt system. They’re engaged in faux battles and we’re being misled if we pay more than cursory attention to them.
We’re locked within a system of which the trinity is a critical element. What is this system? One of its fundamental features is concentrated economic power and this is extremely well illustrated in a graphic presentation in today’s New York Times which shows that the bottom 80% of US society controls just 16% of wealth. We live in an oligarchy, it’s that plain and simple, yet none in our trinity meaningfully oppose it. Democrats are almost as eager to cut benefits and wages for the bottom 80% as the republicans and the debate on income taxes ranges very narrowly between a modest few percent increase to further reductions. Union leaders readily bargain away wages, benefits, and security and fight only when their entrenched position “at the table” is threatened. The “New Keynesians” are of the same ilk. They critique the system at the margins while supporting its fundamentals. This is very much at odds with Keynes himself who did fundamentally challenge the heart of capitalism.
Let’s look at Paul Krugman as an example of the leftward pole of “New Keynesiansim”. Krugman is a respected public voice for liberals and I agree with many of his comments in the Times and on his blog. But his access to the Times is based on his position as an economist and his economic writings are fully supportive of the status quo and are fundamentally orthodox. For example, his backing for public spending is quite narrow:
“In particular, the case for stimulus has always been highly conditional. Fiscal stimulus is what you do only if two conditions are satisfied: high unemployment, so that the proximate risk is deflation, not inflation; and monetary policy constrained by the zero lower bound.”
Regarding the deficit, he favors a regressive 5% value added tax and worries about rising inflation should the unemployment rate fall below 7%. In such a case, he says, the government should reduce fiscal spending in exchange for no hikes in interest rates. Very Rubinesqe. And very different from Keynes who advocated redistribution during boom times in order to raise the propensity to consume and reduce the needed level of investment.
Krugman accepts the concept of NAIRU, “the non accelerating inflation rate of unemployment”, despite it being seemingly disproved in the past decades and despite its immoral use as a theoretical justification for forcing unemployment on the least advantaged as a means of slowing the economy. Here is Krugman in a highlight section of his macroeconomics textbook:
“Policies that keep the unemployment rate below the NAIRU will lead to accelerating inflation as inflationary expectations adjust to higher levels of actual inflation. The NAIRU is equal to the natural rate of unemployment.” …. “an unemployment rate below the NAIRU cannot be maintained in the long run. As a result, there are limits to expansionary policies.” (page 462)
In his “The Return of Depression Economics”, Krugman praises multinational corporations and capitalism for reducing global poverty and is critical of globalization opponents to such a degree that he pulls out the standard right wing blurb that “bad jobs at bad wages are better than no jobs at all”. To elaborate on this point, he even wrote an article entitled “In Praise of Cheap Labor”. What he and others in his “school” ignore is the historical and global nature of capitalism and the reality of class power and oppression. If he looked carefully at the countries in which workers are so badly off, he would undoubtedly see extremes of class domination and vastly unequal control of land and resources by both the local elite and foreign capital. The historical colonial powers and especially the United States in the past century have done much to encourage such conditions. To praise cheap labor given these facts is either an affront to most conceptions of morality or, to turn his phrase from the article against him, a failure to think things through. What it ultimately reveals is no less than a knee jerk acceptance of capitalist logic.
And finally, Krugman sees much of our current problem as being a “liquidity trap”, a condition in which interest rates are at a lower bound of zero but need to be even lower in order to incentivize holders of wealth to spend rather than hoard. His solution is for the central bank to promote inflation so that real interest rates become more negative and thus hopefully provide the needed stimulus. The position is far from Keynes, though, since it’s solely reliant on the actions of private wealth holders as the key to full employment. Keynes saw that society couldn’t reasonably rely on private investment and should therefore socialize much of it. Instead of trying to stimulate the investment urges of wealth holders with a bit of inflation via monetary policy, he sought “the euthanasia of the cumulative oppressive power of the capitalist to exploit the scarcity value of capital”. He wanted to completely eliminate interest and rent on the moral ground that they rewarded no genuine sacrifice. Keynes incorporated the basics behind the idea of a liquidity trap into his analysis with the insight that the going interest rate is often higher than the profitability rate of new investment, thus leading to wealth hoarding. His proposal, though, in addition to socializing investment and reducing the interest rate to zero, was to tax wealth that failed to productively invest and to redistribute income in order to reduce the very need for high levels of investment spending. Krugman doesn’t go anywhere near such radical solutions even though it’s difficult to conceive anything less could possibly succeed. Instead, he advocates minor tweaks of monetary policy that do nothing to threaten the fundamentally unequal structure of society.
Similarly status quo enhancing, pro-investor positions can be seen with all the “New Keynesians”, as I’ve posted here and here (Brad DeLong), here (Peter Orszag), and here (Lawrence Summers), to name just a few.
Those who are appalled at the reality of a social system that distributes 16% of wealth to the bottom 80% need to reject the faux left trinity as nothing more than enablers of oligarchy. Mainstream democrats, co-opted union leaders, and “New Keynesian” economists are not part of any true solution – they are the problem. And they’re a far bigger problem than the right wing groups with whom they feud since they give credence to the system, contaminate our discourse with faux battles, and establish the effective limits of legitimate protest. Discrediting the trinity is a necessary first step if we seek true progress. It’s not at all a personal thing. Paul Krugman could actually be part of a solution; but Paul Krugman, Professor of “New Keynesian” Economics cannot.