Economy: In the middle of the worst economic decline in over 80 years, we need fiscal stimuli, not fiscal austerity

In the political current climate, mainstream Keynesianism, as espoused by economists such as Paul Krugman and Joseph Stiglitz, has come to seem almost left-wing. Is the Keynesian critique of austerity correct, and is a return to Keynesianism what we need?

Keynesianism only seems left-wing because the center has caved rightward. First, even a Nobel Prize does not protect one from ostracism by the mainstream of the economics profession today if you persist in dispensing Keynesian wisdom and challenge the assumption that unfettered markets always know best. As hard as this may be for non-economists to believe, Stiglitiz and Krugman are now persona non grata within the economics profession. Second, in the 1950s and 60s even Tories and Republicans had to begrudgingly accede to the wisdom of financial regulation and Keynesian fiscal and monetary policies. But that day is long past. Now even Labour and Democrats buy into the myth that markets, including financial markets, can be relied on to self-regulate, and governments must engage in fiscal austerity when recessions create temporary budget deficits. When the center caves right, center left appears to be left.

There are two important lessons to be drawn. (1) While socialists should not have to lead the charge for Keynesian policies to ameliorate capitalist crises, unfortunately that is the position we find ourselves in. Right now we must not only do our own work – explaining why all versions of capitalism are far less desirable than participatory, democratic socialism – but do the work of Keynesian reformers as well who have lost influence in all major political parties. (2) There is no point in trying to explain to Tories and Republicans why their policies are flawed. They have chosen to embrace ill-advised, discredited, nineteenth century economic policies because these policies serve their most important purpose – further pressing the class war they have been winning for more than three decades. Their first instinct when a crisis hits is not to search for policies that would actually solve the crisis. Instead they search their “wish list” for ways to take advantage of the crisis to press for changes that serve their class interests – further cuts in social spending, further concessions regarding wages, benefits, and working conditions, more tax cuts for corporations and the wealthy, and of course more corporate welfare like the bailouts doled out to the financial industry. The fact that every one of these policies will only deepen the current crisis is of no concern to them.

When capitalism proves completely incapable of putting our productive potential to good use what is called for is replacing capitalism with socialism. A return to Keynesianism would be to settle for only part of a loaf, and leave us vulnerable to another counter revolutionary roll back of hard won gains, like the one we have been living through. However, unless I am pleasantly surprised, and leftists can win the loyalty and support of a majority of the population for replacing capitalism with socialism much sooner than I foresee, there is no road to participatory, democratic socialism that does not run through many successful reform campaigns to bring Keynesian policies back in vogue.

The rest of the story: Digging In A Hole -- Robin Hahnel, economics professor at American University and author of Economic Justice and Democracy: From Competition to Cooperation and, with Michael Albert, of The Political Economy of Participatory Economics, discusses the continuing mismanagement of the economic crisis in the UK, Ireland and the US with Alex Doherty of New Left Project.

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