I have been thinking a lot lately about what economics was like during the 1960s when I studied for my undergraduate and Ph.D. degrees in the discipline. We studied Milton Friedman, among others, in microeconomics, but Keynesian economics (The General Theory of Employment, Interest, and Money, 1936) was the accepted wisdom in macroeconomics. It was accepted that both monetary and fiscal policy had legitimate and essential roles in guiding and balancing market economies. It was also accepted that regulations over a wide range of market activities were necessary to check the excesses of capitalism and assure that market economies function for the common good. This included regulations covering banking and monopoly markets. (Systematic attention to the role of environmental regulations was just beginning at that time, however.)
Barry Goldwater, of course, pushed the unregulated, ‘free market’ ideology in his 1964 Presidential run. But it was not until Ronald Reagan’s two-term Presidency in the 1980s that this ideology came to dominate government macroeconomic policy, or perhaps I should say ‘non-policy’. How long has it been—prior to recent weeks—since you even heard any discussion of fiscal policy in the political press? With the Republican Party advocating nothing but tax cuts (mainly for the wealthy, of course), and the Democratic Party feeling compelled to largely follow suit (though with more emphasis on middle class tax cuts), macroeconomic policy came to be synonymous with monetary policy. Macroeconomic policy was left to the Federal Reserve Board, and the once prominent President’s Council of Economic Advisors faded into near oblivion.
Writing in The Nation magazine on October 20, William Greider calls for a new generation of ‘New Deal’ economic programs based on Keynesian economics. In spite of the monstrous Federal deficits that have accumulated during the Bush years of foreign empire, tax cuts for the wealthy, and unregulated capitalism, Greider says that a Keynesian recovery program is essential at this time. Greider notes the need to rebuild our nation’s infrastructure and jump-start the ‘green agenda’ for alternative fuels and restoration of ruined ecosystems. In his 2007 book, The Conscience of a Liberal, Paul Krugman also makes a compelling case for moving aggressively ahead with implementation of a comprehensive national health care system. This is necessary not only for equity reasons but also because the current, haphazard American ‘non-system’ is far too costly for the economy.
I agree with Greider and other progressives who are calling, in effect, for the resurrection of the economics of John Maynard Keynes. We are long overdue for a return of fiscal policy as part of the macroeconomic policy mix, and for restoration of the kinds of market regulations and progressive tax policies that finally emerged in this country following what Krugman calls the ‘Long Gilded Age’ and the Great Depression. It is time now for our elected leaders to stop running from the word ‘liberal’, and to start uttering the words ‘fiscal policy’.
Given the economic hole we are now in, it likely will be impossible to fully balance the annual Federal budget over the next several years, but—as one of the two Presidential candidates acknowledges—it will be necessary to increase taxes on high-income people. It may also be necessary to increase taxes on persons in the upper ranges of the ‘middle class’, but any of us fortunate enough to be in those ranges during these troubled times should be willing to contribute more to the common good.
There is a rapidly growing recognition by many, if not most, economists that recent and announced actions by the Treasury Department and the Federal Reserve will not be sufficient, by themselves, to restore health to the U.S. economy. Even if we are fortunate enough for financial markets to somewhat stabilize for a time (no evidence of that yet, however), nearly three decades of ‘free market’ excesses have left the ‘real economy’ in very bad shape. Fundamental regulatory reforms and the return of Keynesian economics to the policy mix are absolutely essential! In moving quickly to the kind of balanced economic policies that prevailed for a time in this country during the 1950s and 1960s, we need to do the following:
- Avoid propping up individual corporations or industries that are unlikely to serve the long-term economic health of the country. We have already set a highly questionable precedent by recently approving $25 billion in loan guarantees for the U.S. auto industry. U.S. automakers had plenty of time, on their own, to make necessary adjustments, but they chose, instead, to pursue short-term profits by cranking out big cars and trucks. Many other businesses and industries are going to be lining up soon for bailouts, if they are not discretely doing so already. At least one major ethanol company, for example, appears to have its back to the wall, in spite of massive Federal and State subsidies of every size, shape, and form going to the ethanol industry over many years. What should have been known all along is now becoming increasingly evident—that corn-based ethanol is not a cost-effective way to solve our energy problems and that it will do little, if anything, to relieve global warming. Moreover, in my opinion, cellulosic ethanol is unlikely ever to be economically efficient on any meaningful scale. It is time to cut our public losses on such businesses and industries that either bad government policies or distorted financial markets helped to foster. In the new ‘New Deal’, the Federal government should help fund infrastructure that will support regional economies and the national economy broadly, not businesses that are unlikely to contribute directly to the general good.
- Especially in the short run of the next few years, give priority to infrastructure construction that employs many people, and require payment of a relatively high minimum wage for all contract work associated with Federal funding. Federal money should go toward road and bridge repair, construction of urban mass transit systems, and development of a European-type national rail system. It also should fund salaries in human resource-intensive sectors, especially elementary and secondary school systems and health care and nursing home systems. Anyone who has taught in our public school systems in recent years (or has relatives who teach) knows how strapped and over-worked our teachers are. We need to forgo the recurring cycle of education ‘reforms’ and ‘mandates’ and, instead, put more teachers and aids in the classrooms! Many financial service sector employees will find themselves without jobs during the next two or three years. With some summer school training in our colleges and universities, many of them could quickly be made ready to serve as teacher aids. They may not make the money they did before, but they would at least be employed. In fact, there are many people that have left the teaching profession over the years who, with a summer or semester of classes, could be quickly recertified and brought into the classroom as regular teachers, allowing class sizes to come down to more sane levels. Do that, and scrap ‘No Child Left Behind’ legislation, and the end result will be far fewer kids actually left behind.
- Beef up our Federal regulatory agencies, including those involved in financial, environmental, and food safety oversight and regulation. In doing this, we need to discard the derogatory language about bureaucrats and the Reagan and Bush-era obstacles to honest, civil servant efforts to protect the public interest. Regulatory agencies require skilled workers. In fact, in many cases, the economic, accounting, legal, mathematical, natural science, and other skills required are ones already possessed by people who will be displaced from their present jobs in the coming economic turmoil.