Friday, May 16, 2008

Obama and Keynesianism

In my periodic Googlings for "Obama economics" I've come across this odd post "Obama's Excremental Economics." You might think the title would give it away as a hysterical screed, but it seems to have picked up attention on conservative blogs, and the language doesn't sound completely insane, so I thought it would be worth pointing out what's wrong with it. Here are the main parts of the text:

As prolongation of the 1930s Depression and stagflation in the 1970s demonstrated, Senator Obama’s announced policies are a prescription for economic disaster. Keynesian economic doctrine, not under that name, but in substance, is back in the news in a truly menacing way. Senator Obama proposes to repeat the policies of Franklin Roosevelt’s New Deal that turned an ordinary two-year recession into an eight-year disaster, with unemployment rates continuously in the high teens.

The key elements of Senator Obama’s proposed economic policies, as in the New Deal and the stagflation of the 1970s, are much higher taxes, along with a pervasive increase of business regulations and price controls in healthcare and energy (which sharply depress business activity and employment rates), full-frontal embrace of labor unions (which will push up wages and benefits to levels deterring profitable expansion of industrial production), and massive new government deficit spending (which will accelerate the already dangerously high rate of inflation and devaluation of the dollar). Carried out as he proposes, Senator Obama’s polices will lead us again into the swamp of stagflation.
So, to sum up the key points: 1) Keynesianism is a bunch of bad stuff. 2) Keynesianism (or the New Deal) caused the Great Depression. 3) Keynesianism caused the stagflation of the 1970s. 4) Obama is proposing to reintroduce Keynesianism/bad stuff.

1) Keynesianism is a bunch of bad stuff. So what is Keynesiasm anyway? Boiled down to its essence, Keynesiansim is an economic theory that says that the government can help get the economy out of a slump. For a more complete explanation, Wikipedia isn't bad. Of the points mentioned in the post--higher taxes, business regulation, price controls, labor unions, deficit spending--none are really "Keynesian," except for deficit spending, and that only in time of an economic downturn. In boom times, the Keynesian view is that the government should run a surplus.

2) Keynesianism (or the New Deal) prolonged the Great Depression.This is a fringe view, and I'd never even heard of the idea until I read this post. Here is part of a discussion in which Brad Delong defends his statement that "A normal person would not argue that the New Deal prolonged the Great Depression."

3) Keynesianism caused the stagflation of the 1970s. I believe the mainstream view of the stagflation of the 1970s is that it was caused by a combination of the oil price shock and the subsequent unsuccessful effort of central banks to avoid an economic downturn by priming the money supply (a Keynesian response.) But this was really a damned-either-way situation. If the central banks had reined in the money supply, we would have had a bigger recession, albeit without inflation.

4) Obama is proposing to reintroduce Keynesianism/bad stuff. Obama can't be reintroducing Keynesianism, since it's been the guiding force for macroeconomic policy almost as long as John McCain has been alive. In recent months, when the Fed lowered interest rates and Bush signed a fiscal stimulus package, we saw Keynesianism in action. There are differences of opinion as to which Keynesian levers to use, and how hard to pull, but no one seriously argues that when it comes to the recession the government should just sit back and wait for it to end. (OK, OK, there are a few academics, but even the Republicans have had enough sense to keep them far away from actual macroeconomic policy.)

How about higher taxes, increased business regulations, price controls, more support for labor unions, and deficit spending? Yes, Obama is proposing higher taxes on the wealthiest Americans, but wants to lower taxes for the middle class. Yes, he does want to modernize financial regulation, as do both McCain and Bush. Yes, in the energy sector, he wants to introduce cap-and-trade, but so does McCain. Yes, Obama is proposing a greater role for the government in health care. McCain, in contrast, wants to kill the current health care system. Yes, Obama does support labor unions, and, yes, greater union power just might push up wages and benefits a bit, but most people take that as a good thing.

On deficit spending, if that's your issue, you should definitely vote for Obama. As we've noted before, McCain's program would result in massive new deficits which would dwarf what Obama is proposing. Consider this:
Mr. McCain’s plan would appear to result in the biggest jump in the deficit, independent analyses based on Congressional Budget Office figures suggest. A calculation done by the nonpartisan Tax Policy Center in Washington found that his tax and budget plans, if enacted as proposed, would add at least $5.7 trillion to the national debt over the next decade.

Fiscal monitors say it is harder to compute the effect of the Democratic candidates’ measures because they are more intricate. They estimate that ... the impact of either on the deficit would be less than one-third that of the McCain plan.
Although the "excremental" essay is mostly crap, in some sense it gets Obama's vision right. He does hope to build on the successes of the New Deal--things like Social Security, Medicare, unemployment insurance, and federal deposit insurance--that have made our lives better. Fortunately, despite years of Republican propaganda (like the above essay) which has tried to make government out to be the enemy, most Americans understand that the New Deal was a good thing, and few will be scared by the prospect of "menacing" Keynesianism.


MattYoung said...

Obama falls into the general election trap of trying to protect the expectations of his constituents, whom we led to believe, in the primaries, that government can do more than is realistic.

The entire Republican election plan is to slowly reveal truth to naive Obama constituents.

Obama's best strategy, right now, is to unambiguously state that there will be no updates to entitlements until two years into the administration.

If he did that, he would do everyone a big favor.

Matt Young

donpedro said...

I don't think Obama has any secret plans. It's all there in plenty of detail on his website. In contrast, McCain is deliberately vague on key aspects of his plans, e.g. the health care plan, the ATM fix, what he would do in Iraq.

I don't know what you mean by "updates to entitlements."

MattYoung said...

An "update to entitlement" is what I expect to avoid when I sell and buy houses before the next phase of our political cycle.

I know that conditions will change when we upgrade or change the entitlement scheme. I know that the housing run will stop after the election. I know that my best hope is to rearrange real estate so I am sitting in a good position when the new entitlement scheme is implemented.

In other words, I have already priced in the Obama changes into my life style, I have already taken my money off the table, that is why I can support him.

Obama can be elected precisely because the whole gang of baby boomers shifted wealth to insulate themselves from the changes. The effect of his election has already occurred, we have already arranged for his constituents to pay his bills.

His constituents do not know this, yet.

MattYoung said...

I did as the poster said and went through Obama's web site. I started with this:

"I am in this race to tell the corporate lobbyists that their days of setting the agenda in Washington are over."

Now, Obama is a student of American history, and he knows that American's have gone through this changing of the cycle for 200 years, it has been the salient feature of the American system, designed to accommodate two differing economic0 philosophies.

His reform of the K Street lobby will last about 8 to 10 years, and our production plans have already reflected that fact. Our production plans, after 200 years of this cycle, anticipated Obama's arrival some 40 years ago.

Obama knows that government will shrink under his presidency, that is why we have elected him. His particular web site policies make little difference, we have already invested in anticipation that government will be pulling back in a significant manner.

It is not Obama's choice to be counter cyclical, we the economic agents have already arranged the available wealth to force a pull back in government expenses.