Future of Keynesianism

Doug Henwood dhenwood at panix.com
Thu Jun 25 08:25:15 PDT 1998

Mathew Forstater wrote:

>neoclassical synthesis Keynesianism couldn't explain that or anything
>else, but Keynesianism, even of a crude kind, could and can easily explain
>stagflation. The idea that deficient demand means unemployment and excess
>demand means inflation and therefore you can't have both at the same time
>in the K view is a caricature. Simplistically, there are other kinds of
>inflation than that due to excess demand. Further, the 'failure' of
>policy to 'cure' stagflation can easily (and reasonably) be argued as not
>the result of the weakness of Keynesian policy, but rather that Keynesian
>policy was not nearly strong or bold enough.

So what caused the inflation then? And what bolder Keynesian policies could have been applied?

>the consumption boom doesn't have to be (is not) due to decreased budget
>deficits or decreased G (important to distinguish these, also, btw).
>Doug, don't tell me you believe externally financed C and
>I are financed out of a fixed pool of savings, and G borrowing "crowds
>out" private in a modern capitalist economy running below full capacity
>and full employment of resources and with a modern banking system? modern
>financial systems don't need savings to extend credit.

No, but there is a limit on credit, no? I think the which comes first, investment or savings, argument is a dead end: each determines the other. (Or as Keynes said, they're two names for the same thing, that portion of income that isn't consumed.) Credit can allow investment (or consumption) to exceed the constraint of existing savings or incomes, but only by drawing on the future; if there's no increased surplus to validate that extension of credit, you get either default or inflation.

Still, I think if you'd asked a Keynesian in 1993 or 1994 what would happen if the U.S. went from a structural budget deficit of 3.4% of GDP in 1993 to 0.2% in 1997 with real short-term interest rates around 4%, s/he would have painted a picture of stagnation, not steady, respectable growth.

>By the way, have you ever seen Fred Thayer's stuff (some in _Social
>Policy_) on the historical relation of depressions/recessions and fiscal
>contraction. There's pretty strong historical evidence for a relation,
>with causality going from fiscal cintraction to recession and depression.

I have seen that. We'll see, won't we?


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