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03/11/2013

Is Jeffrey Sachs taking the name of Keynes in vain?

By Steven Pressman

Jeffrey Sachs has written an unbelievably bad piece for the Huffington Post. The piece is a follow-up to his Washington Post op-ed with Joe Scarborough entitled “Deficits Do Matter” as well as Krugman’s response to this op-ed on his New York Times blog.
 
I don’t really want to delve deeply into the issue of whether or not a short-term stimulus will contribute to economic growth and employment. That is an issue on which I will not likely convince Sachs or opponents of fiscal stimulus.
 
What I mainly want to take issue with is using the name of Keynes in vein, and presenting a misleading view of what Keynes wrote to argue against the sort of Keynesian stimulus that Keynes himself clearly supported. It is hard to read The General Theory, especially when thinking about the context in which it was written, and not see that Keynes was proposing an active policy of tax cuts and government spending in order to increase demand and put people to work. Many other writings by Keynes from the early 1930s (and even earlier) make the same point about fiscal policy. It is clear where Keynes stands on deficits in the midst of high unemployment; to imply otherwise is to do Keynes a grave injustice.

Sachs starts by quoting Keynes on the need for structural policies to deal with the unemployment problem facing the UK in 1937. In an article in The Times, Keynes wrote in 1937: "We are in more need today of a rightly distributed demand than of a greater aggregate demand." Then, adopting the debating technique of the non-sequitur, Sachs accuses Krugman of holding several views that he calls “crude Keynesian” and refers to some of Keynes’s writing that seems to support this. He then moves on to critique some elements of this crude Keynesian economics.
 
First, the one sentence quotation from Keynes is not a clarion call for structural policies; nor is it an admission that the UK was experiencing structural rather cyclical unemployment (it was written when unemployment in the UK was 12%). For a long time Keynes had supported policies that would increase demand through redistribution—policies such as family or child allowances financed by higher taxes on business profits. His 1930 article in the Political Quarterly, "The Question of High Wages," makes the case for such redistributive policies in order to raise demand. This piece also advocates greater government spending on social insurance programs, pensions and "useful expenditures" such as health, education and travel.

All this is not really much different from what Keynes set forth in The General Theory. To argue that Keynes abandoned Keynesian demand policies for structural policies based on this single sentence fails to do justice to Keynes. The sort of policies he supported in 1937 were the sort of policies he had supported for years—running large government deficits in times of unemployment (and surpluses in good economic times) in the belief that unemployment was cyclical in nature. His preferred solution was always the sort of public investments that most economists (including Jeff Sachs) advance and support. But Keynes was a realist. He knew that when, for political reasons, we could not build schools and hospitals, or invest in pre-school, we would have to print money and bury it in abandoned coal mines—the deficit be damned. Keynes was focused on a practical means to increase demand and employment; he wanted the biggest bang in terms of jobs for the lowest buck (government deficits). If Sachs would only read some Keynes, or some good commentaries on Keynes (the chapter on Keynes in my book 50 Major Economists is a simple and easy place to start), he would at least get Keynes right.
 
Sachs’ rejection of crude Keynesian economics because it depends on a particular value of Keynesian multipliers and assumes their consistency over time is even more disturbing. It is also really beside the point. It does not matter if the spending multiplier is 1.5 or 1.3 or even 1.7. And it does not matter if the value of multiplier changes or varies within this range, as long as fiscal policy does what it is supposed to do and creates jobs. In fact, even if the government spending multiplier were 1, and even if it varied substantially around its mean value of 1, each dollar of government spending would increase GDP by one dollar (on average) and more jobs would be created as a result. There is absolutely nothing in Keynes and nothing Keynesian that requires a large and stable multiplier. Again, some familiarity with Keynes and Keynesian economics before writing about them is the least one would expect from an economist teaching at Columbia.  
 
This would somewhat excusable if the debate were mainly a matter of abstract theory. But much is at stake here. At this point in time, the choice for both the US and Europe seems relatively simple. Are we to have a stimulus program in the face of high unemployment, as Keynes advocated? Or are we to have austerity and extremely high rates of unemployment? Do we have Keynesian economics or do we have de-Keynesian (pardon the pun) economics due to Jeff Sachs?

Steven Pressman is Professor of Economics and Finance at Monmouth University in Long Branch, NJ, USA. He is a trustee of the Association for Social Economics and a member of the editorial board of Forum for Social Economics, as well as the North American editor of Review of Political Economy and associate editor/book review Editor of Eastern Economic Journal. He is author/editor of more than a dozen books, including Fifty Major Economists, 3rd ed. (Routledge, forthcoming in 2013), and can be found on Facebook and Twitter.

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