Back to the Future

During the postwar boom, it seemed that mass unemployment had been cured forever. A mixed economy--based on activist government, deficit spending, public investment, strong trade-unionism, a welfare state, and a warfare state--kept the industrial West on a high-growth path. Living standards rose steadily. Satisfied voters returned to office politicians who believed in this model.

Not only is that economy dead, but the soil that nurtured it has seriously eroded. Today most politicians in the West believe their task is to expunge the mixed economy, not to reinvent it. As mass unemployment keeps rising and wages stagnate, it is bizarre to watch governments pursue freer trade, more deregulation, limitations on government, balanced budgets, and privatization, as if a pre-Keynesian free market would somehow restore high growth and full employment.

With the collapse of communism and the revival of ghosts of prewar nationalism in both Eastern and Western Europe, the stakes could not be higher. Accompanying the echoes of the economic privations of the 1930s is a chilling resurrection of the politics of that grim decade.

Against this background, it is worthwhile to reread John Maynard Keynes, who understood better than anyone how economic calamity led to political disaster. As Will Hutton reminds us ("Back by Popular Demand," p. 50), we need not a renewal of bloodless "demand management" but a reclamation of the whole Keynes-- the Keynes who understood the connections between full employment and political democracy, the need to keep financial markets subordinate to the real economy rather than vice versa, and the very tricky relationship between global capitalism and a domestic mixed economy.

With the long-awaited second volume of Robert Skidelsky's biography of Keynes, we anticipate a Keynes boomlet. But given the bowdlerization of Keynes's economics since his death in 1946, it is important to reclaim the real Keynes. As John Eatwell suggests in his review essay ("Citizen Keynes," p. 115), though Skidelsky does a masterful job of recounting Keynes's life, he tends to diminish the full-throated radicalism of Keynes's work.

At the center of everything that we liberals hold dear is the logic of full employment and rising living standards. Without full employment, scarce government resources go to support the idle. Without full employment, taxpaying people with jobs credit their good fortune to private virtue and resent the unemployed. The social empathy and political solidarity necessary to sustain progressive politics and economics fragments. Without full employment, young people face stunted economic futures and generational warfare breaks out. It becomes more difficult to integrate minority groups into the mainstream economy, and tolerance of all kinds suffers. In short, without full employment, the other elements of liberalism fall apart.

Today unemployment is persistently high in all of the advanced countries. Employment is rising in the developing South, but often at the expense of wage levels in the North. Inequality is rising everywhere, as workers without advanced skills are thrown into competition with one another for a dwindling supply of routine jobs. Because of the turning away from Keynesian insight, governments address these problems with inadequate conceptual tools and limited policy remedies.

Budget balance is held sacred, which both slows growth and denies governments necessary resources. In the United States, for example, the Clinton administration is placing great faith in the cheap money cure. Thanks to lower interest rates, unemployment has dropped somewhat. But millions of people are still having to take part-time, temporary, or minimum-wage jobs. Millions more can find no jobs at all. Keynes was passionate about low interest rates. He called for "the euthanasia of the rentier"--an end to the class that clipped coupons and cherished tight money; he looked forward to a time when cheap capital would almost be a public utility. But he viewed low interest rates as necessary, not sufficient, since one could not count on private entrepreneurs to invest adequately.

In addition, the pre-Keynesian emphasis on fiscal rectitude has left the moderately liberal Clinton administration competing with its conservative opposition to cut government outlay. A public investment package was abandoned early in the administration. Even programs that pass "New Democrat" muster, such as job training, national service, enriched education, or high-tech research, are funded at token levels if at all.

In recent speeches, President Clinton has boldly called for "economic security" as his thematic centerpiece. If people are to have the courage to change, they need confidence that jobs, and health insurance, and personal security will still be there. This is a marvelous strategy for reconciling economic dynamism with a civic social contract. But the cupboard is evidently bare.

When the North American Free Trade Agreement was before Congress, Clinton sought to reassure Democrats that workers displaced by the shift of jobs to Mexico would qualify for retraining and reemployment. But Clinton could find just $22 million for additional job retraining--less than one-twelfth of what George Bush had proposed to make NAFTA more palatable. Because of the obsession with greater budget balance, Clinton has promised centrist Democrats tens of billions of dollars of additional budget cuts, beyond those negotiated in the 1993 budget deal. These cuts will remove what little remained of new public spending and will reduce domestic outlays below the levels of the Bush administration in most categories. This, too, reflects pre-Keynesian thinking about economics.

Even if job training were funded at adequate levels, it is not at all clear that a "supply-side" strategy of improving the skills of workers would solve the problem of job availability and job quality. In 1940, unemployment was above 13 percent. By mid-1942, it had dropped to 3 percent. This did not occur because of massive training programs. It occurred because the biggest public works program in history--the Second World War--created a demand for workers, most of whom learned what they needed to know on the job.

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If training programs are to do more than produce overqualified and under-employed workers, such programs must be married to a full-employment economy. Training can certainly be part of the strategy. When a worker takes leave to go on a training sabbatical, a slot is opened for another worker. Training also reduces labor-supply bottlenecks in certain specialties, which limits the tendency of tight labor markets to drive up wages and cause inflation. But retraining, like cheap money, can never be the whole full-employment policy for it doesn't create enough jobs. In addition, we need the massive scale of public investment that conservatives normally sanction only in wartime.

With the exception of Germany, where massive investments in infrastructure seek to bring eastern German living standards up to western ones, no government is pursuing Keynesian policies. Even in Germany, inflation-phobia combines Keynesian public works spending with austere monetary policy, leading to persistent recession.

Reclaiming full employment as a centerpiece will require not just new strategies of public policy but a reconsideration of the principles of political economy. In future issues of The American Prospect, we will explore the several dimensions of the jobs question in great detail. For now, we wish to get back to first principles. We take pleasure in reintroducing, after far too long an absence, J.M. Keynes.

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