REAL DEBATE: Caffeinated versus Real Art on Economics

My old buddy Matt, writer of the esteemed blog Caffeinated, responds in comments to my Professor Atrios post from yesterday:

Boy, am I out of my depth on economics. But, freshly off rereading a Galbraith book from college ("The Japanese model is the future!"), I'll take a swing.

I feel the doom and gloom myself sometimes, but I think we need to acknowledge the cycles. When Keynesianism reigned, we were at taxes in the 70% to 90% range and government kept getting bigger. Instead of letting off the gas, the president went for more while trying to fight a war. It all fell down.

Good reason to believe that will happen in this cycle, too. The pendulum swung back, and in doing so, corrected a lot of problems (yes, I'm not the big gov't fan you are, Ron - too much money, not enough accountability, not enough clear objectives). But we're at the extreme and the "winners" of the debate are pushing harder instead of easing off (seems to be a chronic problem in our system). And, they're fighting a war.

The one thing that's different is that in the late 60's and early 70's, the other side (classicists) was prepared to capitalize. Are the forces of the economic left ready now?

Flame on...

"Flame on?" You calling me gay? Not that there's anything wrong with that.

Anyway, it's way cool that Matt dropped this intelligent and level-headed dissent to a post that included my quick lament that there's not really been much real economic debate at the national level these past couple of decades or so. But then, unlike politicians, neither of us has much to lose or gain one way or another by asserting opinions that may or may not be unpopular, so we can both speak freely on the subject.

(Quick aside: when we were seniors in high school, we both ended up at a weekend seminar that was supposedly about public speaking, but ended up being an intensive far right economics indoctrination program. Goddamn Rotarians. I think it affected us both. That is, the propaganda didn't take. Obviously, I'm pretty far to the left on economics these days, and Matt, a businessman in marketing, is pretty moderate on economics, as far as I can tell, which is very cool, I think, because so many businessmen lean to the right. And by "moderate," I mean true moderate, not Joseph Lieberman moderate. Anyway, Matt's simply being humble when he says he's out of his element here. He and I have both been thinking about economics for some twenty years now, far more than most Americans are willing to do. Yeah, yeah, I'm complimenting myself, too.)

Anyway, onto my response.

I need to read some Galbraith myself. He had a great reputation for economic compassion, taking seriously issues that neoliberals quickly dismiss. Of course, given the moribund economy that the 80s Japanese handed down to the 21st century Japanese, it's clear that Galbraith wasn't right about everything. But then, I'm sure that Galbraith never claimed to be a soothsayer.

Matt's right to criticize the growth of government spending during the Keynesian years. Indeed, Keynes himself asserted increased spending during recession, but also asserted spending cuts during expansion. The politicians simply couldn't get it right. By the time LBJ came along, Keynesianism, in practice, no longer resembled the economist's writings. Spending on the Vietnam War shattered the entire framework, and sent the whole country lumbering relentlessly toward the awful "stagflation," recession coupled with inflation, an entirely unprecedented economic development, of the 70s. Nixon, Ford, and Carter were all powerless in the face of stagflation. Only Reagan, with monetarists and supply siders in key advisor roles, was able to lick the problem.

Yeah, that's right, I'm actually giving the neoliberals some credit here. They had the right ideas at the right time for the right problem. Only through drastic increases in interest rates, and targeted tax breaks to ensure that companies actually could meet demand without raising prices and contributing to inflation, could the terrible cycle of stagflation be beaten. Of course, like the Keynesians who only used the parts of Keynes they liked, which eventually discredited their ideas, the neoliberals see themselves as having all the answers all the time: sadly for them, their time has come and gone. Sadly for us, we still have to deal with them.

And that's one of several reasons why I'm dubious that the business cycle, or maybe what Matt's referring to is more of a political cycle, is what's in play right now. Neoliberalism, or "free trade," whatever you want to call it, has taken on, culturally, a life of its own. Taxes, which are obviously necessary for all states, is now a dirty word among the ruling elite--consequently, politicians of all stripes push for tax breaks all the time, no matter what the situation. The mainstream news media propagandizes relentlessly this point of view. This is a recipe for disaster.

But neoliberalism-as-irrational-religion is only one factor making me nervous about the futue. In their free trade zeal, the neoliberals, like the Dutch during the infamous tulip boom of the 1600s, have allowed the real American economy, that is, the production of actual things, to languish, while investment and money speculation have largely taken its place. Right now the US economy is far more about capital flow than about supply and demand or jobs--we don't really do much anymore, economically speaking; instead, we just shift money around for profit. In other words, the US economy, to me anyway, appears to be a house of cards, fully at the mercy of events that are totally outside of national control. For instance, the US dollar, which has value only due to global confidence in the US economy and government, is largely kept afloat by foreign governments, most notably China and Japan. Should they ever lose confidence, and our ever increasing dual deficits of trade and budget always present that possibility, they will start selling off dollars, which would, needless to say, send massive shocks throughout the US economy.

And those two deficits I mentioned have their own dangers exclusive of Asian dollar support. The trade deficit means that we have much more value leaving the country than entering it: we're draining ourselves dry, and with a national savings rate of a whopping big fat zero, that's something to worry about. Meanwhile, the budget deficit threatens to slow, halt, or even reverse economic expansion, as massive Federal borrowing serves to suck much needed domestic resources from business.

Overshadowing all of this is global warming, which threatens to destroy the entire world economy.

So name your poison. We are currently dealing with a host of problems that strike me as being unprecedented historically. I hope to god that Matt's right about cycles, because if he's not, the worst case scenario is the end of civilization--if the US goes down, everybody else is going with it.

So, anyway, that's where I'm coming from with my gloomy assessment. It simply appears to me that Democrats and Republicans alike, this means Clinton, too, have fucked around far too much with the foundations of our economy for us to really pull out of the downward slide. What we need is some kind of massive reversal before it's too late, but nobody's even talking about that.

A couple of final points:

I know that most Americans aren't fond these days of "big government," but it seems to me that "big government" is here to stay, like it or not. The GOP has had Congress for twelve years, and the Presidency for six. This has been their best shot at "drowning the beast," but they've failed utterly. I'm not even talking about war spending; Republicans are at least as bad about pork spending as their Donkey Headed colleagues. Given "big government's" inevitability, what we need is total transparency, and legal mechanisms, like maybe a balanced budget amendment, to help out the politicians. Besides, it strikes me that if we're going to live in an era with super powerful corporations, the only check available on their political influence must necessarily be the state--we're going to need some laws to make sure "big government" is able to play that role as well.

Finally, Matt asked if the left is ready to provide desperately needed economic leadership: no, it's not, which is yet another reason that I'm pretty scared.

UPDATE: Matt's penned a fantastic response to this essay over at Caffeinated. Go check it out. I'll try to cobble together a response of my own sometime this weekend.

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