No Apparent Motive

The current issue of The New York Review of Books has the second (of two) superb essays by economists Paul Krugman and Robin Wells on the long lingering recession. Nominally, Krugman and Wells are reviewing three recent books on the causes and consequences of the Great Recession: Richard Koo’s The Holy Grail of Macroeconomics; Raghuram Rajan’s Fault Lines; and Nouriel Roubini and Stephen Mihm’s Crisis Economics.

Primarily, though, Krugman and Wells use their extended review to argue that while the economics of the way out of our current predicament are clear –a large and sustained dose of expansionary macroeconomic policy will restore the economy to full employment– the politics are much murkier. The two economists see no political will in Congress or the White House for deficit spending on the scale required to turn things around, and Ben Bernanke’s Fed seems more concerned about inflation (currently hovering close to zero) than unemployment (currently hovering close to 10 percent).

Krugman and Wells offer an extremely helpful diagnosis and propose a theoretically and empirically grounded course of treatment. But, what is uncharacteristically unconvincing is their explanation for why so many economic policymakers reject their prescription.

According to Krugman and Wells:

In the months immediately following the failure of Lehman Brothers, policymakers seemed to understand that we had entered a world in which the usual rules no longer applied—a world in which running huge budget deficits was an act of prudence, not folly, in which large-scale purchases of debt by central banks were a virtue, not a sin. But that understanding faded fast. Unconventional policies are as badly needed as ever; but policymakers have lost their nerve. Urged on by far too many policy intellectuals, they have reverted to conventional modes of thought.

So, for Krugman and Wells, we’re in the mess we’re in because policymakers have limited cognitive capacities (“understanding faded fast”) and weak spines (they “have lost their nerve”). Both factors are almost always and everywhere true, but they don’t rise to a satisfying account for the now widespread opposition to policies that, if the two are correct (and I certainly believe they are), would massively increase employment and growth. For a team of economics writers that over the last several years has shown such an acute interest in, and eye for, politics, this is a surprisingly underpowered analysis of the real obstacles to full employment. (Krugman and Wells also leave unexplained why there are “far too many policy intellectuals” with “conventional modes of thought,” and, even more importantly, how it is that they hold such sway over elected and unelected economic policymakers. But, that is for another day.)

Back in 1943, one of the original Keynesian economists, Michal Kalecki, offered a concise explanation (pdf) for business opposition to expansionary fiscal and monetary policy in the Great Depression. Kalecki’s analysis is shockingly relevant today and fills in the gap in Krugman and Wells’ otherwise excellent piece.

Kalecki’s thinking is worth quoting at length (the full piece is here in pdf). First, Kalecki explains the context and the central question:

…there is a political background in the opposition to the full employment doctrine, even though the arguments advanced are economic. That is not to say that people who advance them do not believe in their economics, poor though this is. But obstinate ignorance is usually a manifestation of underlying political motives.

…

In the great depression in the 1930s, big business consistently opposed experiments for increasing employment by government spending in all countries, except Nazi Germany.

…

The attitude is not easy to explain. Clearly, higher output and employment benefit not only workers but entrepreneurs as well, because the latter’s profits rise. And the policy of full employment outlined above does not encroach upon profits because it does not involve any additional taxation. The entrepreneurs in the slump are longing for a boom; why do they not gladly accept the synthetic boom which the government is able to offer them?

Kalecki then offers three answers to this central question:

The reasons for the opposition of the ‘industrial leaders’ to full employment achieved by government spending may be subdivided into three categories: (i) dislike of government interference in the problem of employment as such; (ii) dislike of the direction of government spending (public investment and subsidizing consumption); (iii) dislike of the social and political changes resulting from the maintenance of full employment.

More detail on the first point:

We shall deal first with the reluctance of the ‘captains of industry’ to accept government intervention in the matter of employment. Every widening of state activity is looked upon by business with suspicion, but the creation of employment by government spending has a special aspect which makes the opposition particularly intense. Under a laissez-faire system the level of employment depends to a great extent on the so-called state of confidence. If this deteriorates, private investment declines, which results in a fall of output and employment (both directly and through the secondary effect of the fall in incomes upon consumption and investment). This gives the capitalists a powerful indirect control over government policy: everything which may shake the state of confidence must be carefully avoided because it would cause an economic crisis. But once the government learns the trick of increasing employment by its own purchases, this powerful controlling device loses its effectiveness. Hence budget deficits necessary to carry out government intervention must be regarded as perilous. The social function of the doctrine of ‘sound finance’ is to make the level of employment dependent on the state of confidence.

More detail on the second point:

The dislike of business leaders for government spending policy grows even more acute when they come to consider the objects on which the money would be spent: public investment and subsidizing mass consumption.

The economic principles of government intervention require that public investment should be confined to objects which do not compete with the equipment of private business (e.g. hospitals, schools, highways). Otherwise the profitability of private investment might be impaired, and the positive effect of public investment upon employment offset, by the negative effect of the decline in private investment. This conception suits the businessmen very well. But the scope for public investment of this type is rather narrow, and there is a danger that the government, in pursuing this policy, may eventually be tempted to nationalize transport or public utilities so as to gain a new sphere for investment.

One might therefore expect business leaders and their experts to be more in favour of subsidising mass consumption (by means of family allowances, subsidies to keep down the prices of necessities, etc.) than of public investment; for by subsidizing consumption the government would not be embarking on any sort of enterprise. In practice, however, this is not the case. Indeed, subsidizing mass consumption is much more violently opposed by these experts than public investment. For here a moral principle of the highest importance is at stake. The fundamentals of capitalist ethics require that ‘you shall earn your bread in sweat’—unless you happen to have private means.

And more detail on the final point:

We have considered the political reasons for the opposition to the policy of creating employment by government spending. But even if this opposition were overcome—as it may well be under the pressure of the masses—the maintenance of full employment would cause social and political changes which would give a new impetus to the opposition of the business leaders. Indeed, under a regime of permanent full employment, the ‘sack’ would cease to play its role as a disciplinary measure. The social position of the boss would be undermined, and the self-assurance and class-consciousness of the working class would grow. Strikes for wage increases and improvements in conditions of work would create political tension. It is true that profits would be higher under a regime of full employment than they are on the average under laissez-faire; and even the rise in wage rates resulting from the stronger bargaining power of the workers is less likely to reduce profits than to increase prices, and thus adversely affects only the rentier interests. But ‘discipline in the factories’ and ‘political stability’ are more appreciated than profits by business leaders. Their class instinct tells them that lasting full employment is unsound from their point of view, and that unemployment is an integral part of the ‘normal’ capitalist system.

For me, Kalecki’s explanation for the opposition to expansionary macroeconomic policy and full employment is far more credible than Krugman and Wells’ view that policymakers are ultimately just tired or confused. My guess is that Krugman and Wells also have a deeper explanation than what they offered in their NYRB piece. If so, I hope they decide to write it up. Maybe a third essay in the series?