The Great Society of that period was the ultimate Keynesian experiment, and it didn't work very well ... The jobs that Keynes emphasized were AWOL: America became accustomed to high levels of unemployment.
Paul Krugman objects:
The Great Society wasn’t deficit spending, it wasn’t intended to create jobs, and the economy of the 1960s wasn’t depressed. It was social engineering; we can talk about how well or badly it worked, but it had nothing whatsoever to do with Keynesian economics. Now, LBJ did engage in some Keynesian economics: namely, he imposed a contractionary fiscal policy in the form of a tax surcharge in an effort to cool an overheating economy.
Paul is basically correct but let’s go further. The big Keynesian fiscal experiment was that 1964 tax cut, which did seem to work fairly well as the economy returned to full employment by late 1965. While Paul and I were both too young in 1965 to have been included in the discussions between the Council of Economic Advisors and President Johnson, I have had the pleasure of hearing from those who were what kind of macroeconomic advice the CEA gave the President during December 1965. Realizing that the economy was at full employment and seeing the triple whammy of tax cuts, proposed Great Society domestic spending, and the run-up in Defense Department spending from the Vietnam War, the CEA strongly urged the President to push for fiscal restraint lest the Federal Reserve would have to raise interest rates to choke off excessive demand. The President fired back that the Great Society was important to him and that he was not ready to pull out of Vietnam. The President also noted that getting a reversal of the 1964 tax cuts would be politically difficult. The Federal Reserve did raise interest rates in 1966 leading to the 1966 Credit Crunch, which held inflation at bay. However, the Federal Reserve later reversed course unfortunately. So we eventually got a delayed and lukewarm version of the fiscal restraint that the CEA recommended way back in late 1965 – as Paul noted. Too little and too late.
For Schlaes to blame the run-up in inflation on the Keynesian economists that advised President Johnson only shows she has absolutely no clue. But then we knew that already.
Shlaes is full of it, but the tax cut of 1964, originally proposed by Walter Heller under JFK, although only finally passed in 1964, probably later than it was needed, given all the spending increases that were coming down the line, does fit in with the Samuelsonian version of "neo-Keynesianism" or neoclassical synthesis that dominated US discussions.
ReplyDeleteThe real comparison with what Keynes himself thought needs to keep in mind that, as in Sweden, in the UK the traditional pattern had been to run surpluses. So, the fiscal stimuli in downturns urged by Keynes, who preferred public works spending anyway, took the form of reducing the size of the surplus rather than running a deficit. Of course in WW II all this went out the window, and in that context, Keynes himself turned into a more or less fiscal conservative.
I am still waiting for Amity Shlaes, who has some connection with the Council on Foreign Relations, to show that she knows something about John Maynard Keynes's stress on the importance of international economic cooperation - one of the most important aspects of what we need now.
ReplyDeleteI hope that when she next takes aim on Paul Krugman, FDR, the New Deal and Keynes, she shows a bit more knowledge of, for example, what Keynes was really about than some of her writing - e.g. on the CFR website - suggests.
Has she read any of the biographies of Keynes, by Roy Harrod, Robert Skidelsky, or Donald Moggridge, or - extremely pertinent to the current global financial crisis - Donald Markwell's book on Keynes and international economic and political relations?
There's no sign of it yet.
"For Schlaes to blame the run-up in inflation on the Keynesian economists that advised President Johnson only shows she has absolutely no clue."
ReplyDeleteShe didn't say that. She said that the unemployment of the seventies was caused by the economy having to pay the bills for the spending programs initiated in the sixties. Read the article again. Better yet, read The Forgotten Man.