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April 12, 2007 Jamie Galbraith Speaks for the "Vulgar Keynesians" Here's more on the series of posts on supply-side economics, what we knew in the late 1970s and early 1980s, the gulf between academia and Washington, and other issues. This is Jamie Galbraith from comments with a view from inside "the trenches," a view from a "vulgar Keynesian" who stood "against the Reagan Revolution in the early 1980s": James Galbraith: Bruce Bartlett joined the staff of the Joint Economic Committee in 1981, when I did. I was the executive director in charge of the Democratic staff; Bruce was the deputy director in charge of the Republican staff. We set up the committee (which had ten Democrats and ten Republicans, chaired by my boss, Rep. Henry S. Reuss of Wisconsin) so that both sides could fully make their case to the Congress and public. And we battled merrily for a couple of years, and then in 1983 switched jobs, so that we could continue battling under a Senate Republican chairman. Bruce has been a friend ever since, though neither of us yields an inch, I don't believe, on our economic differences. This little history makes me, I believe, a useful representative of the despised sect of "vulgar Keynesians," "crude Keynesians," "discredited Keynesians" and so forth, not yet heard from in this discussion. I was in fact a product of an eclectic economics training at Harvard (Leontief, notably), a bracing year among the Old Keynesians (Kaldor, Robinson) at Cambridge, and a Ph.D. at Yale,in the environment of Tobin but not under his wing. Paul Krugman and I became friends at Yale, and remain so, though we too have had strong differences over the years. Those of us who were in the trenches, standing against the Reagan Revolution in the early 1980s, saw things differently from either the shock troops of that revolution, such as Bruce, or the academic bystanders, including Paul. I and those around me -- the Democratic staff at the Joint Economic Committee -- were bitterly opposed to Reaganomics, both as economics and politics. Why? First, because as politics Reaganomics was aimed at enriching the rich and destroying the economic life of working Americans and the poor. And this is no joke: it did exactly that. Recession, unemployment, the wanton and irreversible destruction of major industries and the fiscal base of the cities, the destruction of unions: all that happened. The cost of curing inflation in 1981-82 was enormous, far higher than the airy comments made above concede. We crude Keynesians believed then, and I believe now, that the steps taken were brutal and unnecessary, and that with hard policy work the problem could have been managed in ways that were far less costly, but that were rejected on ideological rather than economic grounds. Brad DeLong's summary of Bruce's summary of our vulgar Keynesian policy beliefs is, here, reasonably close to the mark, except in one respect. No one in my circle doubted the capacity of monetary policy to crush the economy if pushed sufficiently far. Rather, we believed (accurately, as events would prove), that monetary policy worked against inflation *only* insofar as it brought on a brutal recession. We did not accept the monetarist/supply-side claim, which was presented at the start of the Reagan administration in official projections, that the trick could be pulled off without a recession. We were, of course, perfectly right about that. Second, as a matter of economics, we thought that the combination of supply-side economics and monetarism was fundamentally incoherent -- and we were well aware that the supply-siders and monetarists disagreed with each other more violently than they disagreed with us. As an anti-monetarist and one of the very few Democrats willing to criticize the sainted Paul Volcker, I found myself in rough alliance with the supply-siders more than once (and I have a few handwritten notes from Jack Kemp in my files somewhere). I ultimately came to see the supply-siders as the most effective practical Keynesians around. They were not only willing to run deficits when the situation required, but able to do so, because they skewed the benefits toward the rich, and thus brought political power into play behind the cause of fiscal expansion. This of course is also what George Bush did in 2001 and in 2003-5. I didn't like the redistributive bias, and for that reason I fought the Reagan tax cuts. But I had no doubt, from 1981 onward, that the tax cuts and military buildup, coupled with a reversal of the tight money policy, would produce a strong recovery in time for Reagan's 1984 re-election campaign. And it's worth noting that Reagan had a Tory Keynesian (Murray Weidenbaum) as his CEA chief, who knew this very well. Jude Wanniski was a hugely influential force in the supply-side camp, and his views were the epitome of the supply-side position in Washington. I thought Jude was a crackpot in economics and economic history (his idea that Smoot-Hawley caused the Great Depression, notably; also his passionate advocacy of the gold standard), but there is no doubt that he played a crucial role. There is no complete or accurate account of supply-siderism without Jude Wanniski; he cannot be airbrushed from history simply because sober academic types now think him inconvenient. Notwithstanding our disagreements, Jude and I also became friends; late in his life he staged a vehement and prescient stand against the Iraq war. Incidentally, it is not correct that we crude and vulgar Keynesians were wedded to high marginal tax rates for their own sake. The Bradley-Kemp tax bill, which had much more Bradley than Kemp in it, was endorsed by the JEC Democrats in 1984, in a report that I wrote. It became law in 1986. We made the argument for that bill, because we did understand the usefulness of a broad-based income tax, and the difference between high marginal rates per se and progressive tax system. We also understood that the previous income tax structure was politically indefensible, and that alternatives such as a VAT, which were serious threats, would be worse. The 1986 tax reform saved the income tax, and laid the groundwork for the 1993 upper-bracket increases, which did quite a bit to restore the overall progressivity of the code, and which laid a template for future tax changes. Turning to the monetarists, it's another forgotten fact that the lead monetarists on Capitol Hill at that time were Democrats. One of them was Bob Weintraub, who worked for Parren Mitchell, chairman of the congressional Black Caucus. Another was Bob Auerbach, a Milton Friedman student. Bob Auerbach and I both worked for Reuss, and we shared an office at the House Banking Committee for three years in the late 1970s. Bob A. abandoned monetarism when it fell apart in the 1980s; he now teaches at the LBJ School, and as a matter of fact, we had dinner together tonight. As for the MIT and other conventional-Keynesian academics, those of us in the trenches found them sometimes helpful but often preoccupied with their models and largely unaware of the political issues within which these economic questions were embedded. For instance, we did not have a lot of use for the theoretical supply-side effects of tax policy on individual behavior that respectable liberal economists were prepared to concede. The fact was, dwelling on those supposed effects simply gave aid and comfort to the Reaganauts; there was no way to make the point in political debate and not give away the store when it came time to write a tax bill. As a technical matter, it also seemed clear that the income effects of these tax changes would dwarf the substitution effects, and the evidence I've encountered since does not incline me to change this view. Among academic economists at that time, Bob Eisner was my hero and closest friend and ally; I think no one would call Bob either crude or vulgar, and that is perhaps why he is seldom mentioned in these discussions. (His daughter, Mary Eccles, was on my staff.) As Brad notes, Rudi Dornbusch was, indeed, a politically- attuned advocate of the effect of monetary policy, and as he did more politics, he became more Keynesian. (Rudi's future wife, Sandra Masur, was also on my staff.) But the idea that monetary policy worked to control inflation expectations directly seemed to us to be a gross overstatement of its powers. Bob Auerbach and I designed the Humphrey-Hawkins hearings beginning in 1975, and wrote those provisions of the HH law in 1978. We did it to extract information from the Federal Reserve and not because we thought that setting monetary targets would have some fundamental effect on the psychology of the nation. And while I'm proud of those hearings, that's because they established the constitutional authority of the Congress over the Federal Reserve, not because they somehow cured inflation expectations, as it seems some magical-thinking economists appear to believe. To Paul, these issues were sufficiently "academic" at the time that he could in good conscience accept a staff position in the Reagan administration (on the CEA under Martin Feldstein, after the first wave of Reaganomics had passed). To him, at the time, it basically wasn't a political assignment, just a chance to see Washington under the redoubtable Feldstein. Perhaps Paul and all the others who lined up in the Reagan camp were right - that these were academic issues to be debated and resolved among people who all shared the same larger objectives for the economy. In some ways, I accept this as a subjective matter. I came to respect the sincerity of Bruce, Jude, Murray and others working in the Reagan administration about their goals. Otherwise, I could hardly think as well of them now, as I do. But to me and those in my camp, at the time, it would have been unthinkable to go over to their side. At the time, I saw the Reagan administration as, objectively, a vicious assault on the economic life of ordinary Americans, brought about by the willful and arbitrary rejection of useful policies that aimed to solve problems without inflicting savage harm on the weakest economic agents. I thought, also, that with honorable exceptions the academic economists on the sidelines were weak and indifferent to that harm. I don't think I was wrong about that. JG Update: Bruce Bartlett, whose column in the NY Times began this discussion, responds to Jamie in comments. Posted by Mark Thoma on Thursday, April 12, 2007 at 12:12 AM in Budget Deficit, Economics, Macroeconomics, Policy, Politics, Taxes Permalink TrackBack (0) Comments (58) TrackBack TrackBack URL for this entry: http://www.typepad.com/t/trackback/423467/17652836 Listed below are links to weblogs that reference Jamie Galbraith Speaks for the "Vulgar Keynesians": Comments Lafayette says... New thread, re-posted comment: Nothing being recounted in this forum’s debates, somewhat mired in nostalgia, gives a clear indication of what future policy should be, either in terms of taxation policy to correct income inequality or its counterpart, a reformation and expansion of public services that render value (to the lower and middle-classes where it is needed most). This is where America is hurting. Assigning the blame to Reaganites, however meritorious, cannot and therefore will not address that problem/challenge. The Democratic Party platform needs a program for the future that will obtain or approach the significant societal objectives already attained elsewhere, namely: ● Generalized basic health care services the prices (based upon fair costs), mandated by a government administration and not “what the market will bear” (based upon the process by which hospitals offer non-paid services recuperated on the bills of insured patients), and ● Pervasive skills/competency enhancement that advances the American work population further up the value-added ladder in terms of its abilities, keeping it proactive and not reactive to the advance of global innovations, and, ● A workable solution that offers first-time housing to the lower-classes, with a loan-repayment process that allows the unemployed to suspend loan repayments till another employment is found and, ● A host of other public services (drug abuse, youth obesity, neonatal care, female abuse) that America can well afford in order to bring itself up to a international standard against which it is blatantly deficient. None of the above is rocket-science. None of it is beyond America’s financial means. All of it can be obtained if the political will is there. To do so, an effort must be undertaken to explain convincingly the merit of such societal policies to the American public and how the social investment will better their lives. It must strike resonant chords in Dubuque. Not just ballyhoo, cheers and confetti at a party convention. And, that effort must start NOW - not cooked up hastily six months before the elections by the presidential candidate. Otherwise, the Republicans will cake-walk into the White House - and America will wander in the desert another eight long years. Posted by: Lafayette | Link to comment | April 12, 2007 at 03:24 AM paine says... nice summary wrong administration the shark got jumped in 78 -79 not 81-82 okay the real blodd ran in 82 but that's because a carter team did such an elitist job on hoi polloi america jimmy's tight as bark on a tree was dead wrong to get what jg here correctly wanted demand management by fiscal budget busting the new democrats started failing us long b4 clinton jimmy was bill's st john the baptist Posted by: paine | Link to comment | April 12, 2007 at 05:26 AM anne says... Dear Paine, please, a little less cryptic on history so I can better follow the argument. Posted by: anne | Link to comment | April 12, 2007 at 05:30 AM paine says... thanks for reading it anyway anne simple hicks macro 70's is/lm open system carter was politically resolved to lick the deficit moniker on every dems head back then so when the economy started heading out of control price wise he had only one instrument he'd use monetary policy recall fine tuing had"failed" whatever that was supposed to mean it meant no tax brake for shitty job level amerika to odf set the crdit squeeze PV was only to ready to apply the problem required patience and a 6 year profile and both macro instruments in combination plus some overt fine tuning of debt relief that was politically verboten unless you were a farmer and as i wrote earlier a dollar forex policy the triad needed all avenues working in sync if the plebs were not to bare the hurt of a crunch that was not of their making i say till proven otherwise it was price wage spiraling we had the wage rates were chasing the price increases guys knock that down prove me wrong Posted by: paine | Link to comment | April 12, 2007 at 05:55 AM paine says... btw to say that would have been politically impossible is merely to say the duopoly party system was broken already back then not in the 90's it broke in '68 and is still broken Posted by: paine | Link to comment | April 12, 2007 at 05:57 AM ken melvin says... Thanks the both for the terrific post. Posted by: ken melvin | Link to comment | April 12, 2007 at 06:21 AM Bruce Bartlett says... As always, I find Jamie's observations illuminating. I would just make a couple of points. First, it is unfair to take the actual operations of a government as being a coherent representation of any economic philosophy. If I were to use every action taken by the Roosevelt Administration to refute Keynes, that would be just as unfair as what Jamie has done in using Reagan's actions as the sole basis for judging supply-side economics. Second, I think he conveniently leaves out an important part of the story as far as the JEC was concerned. Before he and I joined the staff, the committee had endorsed a version of supply-side economics. The chairman, Senator Lloyd Bentsen, got every member of the committee to sign a report to that effect in 1980. So Jamie's actions were as much a counterrevolt against the position that had been adopted by the committee's Democrats as it was in opposition to what we on the Republican side were doing. Third, by starting his commentary with 1981, Jamie goes well past the point I was trying to make in my New York Times article. I was writing about what motivated people to even think of supply-side economics in the first place, not about its operational consequences during the Reagan years. My focus was on the 1976-1980 period, when a small handfull of people were trying as best they could to grapple with an economic crisis caused by rising inflation. Just as with Keynesian economics, those who later became advocates for supply-side economics carried the arguments, the policies and the rationale off in a different direction. That was the whole point of my article. What Jamie really shows is that the bastardization of supply-side economics began much earlier than this administration, and he's certainly right about that. Finally, if I were in Jamie's shoes, I would also be trying to make Jude Wanniski the focus of the discussion. Jude was a brilliant man, but also more than a little crazy. A much more important figure and one much more difficult to attack was Norman Ture, which is why people like Jamie tend to ignore him. But Norman was absolutely critical, not just because he was one of the leading tax economists in the U.S., but because his involvement with tax policy went well back into the 1950s. Just as an aside, I would note that Norman had been on the JEC staff in the 1960s, where he functioned as staff economist for Wilbur Mills while he was chairman of the House Ways & Means Committee. It was Mills who really got Kennedy to propose a cut in marginal tax rates in 1963, based on Ture's ideas. Since Norman was also deeply involved in the development of the Kemp-Roth bill, he was a bridge to both major tax-cutting episodes. To the curious, I would recommend Julian Zelizer's book, "Taxing America," on both Mills and Ture. Posted by: Bruce Bartlett | Link to comment | April 12, 2007 at 06:36 AM paine says... BB just proved my point the heart of the policy macro establishment of both parties by 77 (carter year one) had turned from any thought of using raw fiscal keynesianism to manage the macro economy btw love the bentsen moment ( bob rubin in a ten gallon hat) Posted by: paine | Link to comment | April 12, 2007 at 07:20 AM robertdfeinman says... Let's see if I've gotten this right, politicians don't use economic theories so much as misuse them for their own ends. I think that sounds about right. Politicians even misuse reality for their own ends as our current experiences in Iraq demonstrate. Not only didn't Iraq have WMD's, but the Gulf of Tonkin incident didn't take place, nor did anyone sink the Maine. Politicians lie, so what's new? The problem is that when academic economists get into government they think that presenting their "theories" as the basis for advice is all that is required, but they are playing the wrong game. The economists (social scientists, climate scientists, etc) are just used for window dressing so that already decided on policies can be given a veneer of respectability. Even religious leaders are starting to realize they are being used as props. Skip the academic debates and look at the effect of the policies put in place. Cutting taxes on the rich makes them richer. Raising taxes (or indirect expenses) on the poor makes them poorer. We don't need theories to explain this. The issue is: is this the way we want our society to be structured, and if not, what practical steps can be taken to move in another direction? Posted by: robertdfeinman | Link to comment | April 12, 2007 at 07:24 AM bakho says... Interesting history lesson. A big part of the backdrop were the oil price shocks of the 1970s. Oil shocks had major effects on the US economy and relocated the equilibrium position beyond the boundaries of traditional monetary and fiscal policy. Double digit interest rates are unusual for the US. If the oil shocks had such a large effect on the economy, what about the response? A history of the late 70s would describe large increases in energy efficiency (including CAFE standards, appliances, buildings, etc) and companies investing in flexible fuel strategies (ability to switch between oil or gas or electric) to the point where oil use had dropped by over 20% from the late 70s to 1985, thus ending the "oil shock". Did we really improve our monetary and fiscal policy during this period? Or was there a frantic reaction as the economy tried to absorb the oil shock followed by a return to normalcy as reliance on oil diminished? The current view (so I was taught) is that monetary policy can be used as a rapid acting tool to smooth an economy but is insufficient to address structural, infrastructure and technological problems in an economy. In this view, the oil shock set off a wave of inflation and other dislocations that made monetary policy relatively ineffective. Monetary policy was beyond the bounds of acting to fine tune the economy and instead became a sledge hammer. Technological adjustments related to decreased oil demand were necessary before the economy could recover to a position where monetary policy was once again effective. However, the oil shock and the technological changes concerned with fuel efficiency and fuel flexibility were occurring simultaneously and makes it difficult to separate effects of economic shock from monetary and fiscal policies. Are the real lessons of the 1970s and 1980s more effective monetary policy? Or are those lessons about dislocations (caused by oil shock effects) and response to those shocks? Another note, that is not discussed is productivity. Why did productivity increases lag so much during this period? Given the effects of productivity on income and economic growth, discussing the economy as if only fiscal and monetary policy matter (or matter most) is incomplete. Was investment in the 70s and early 80s directed more toward energy effiiciency than to productivity increases? Is that one reason why this period had a lag in productivity? Another missing effect is the increase in the workforce participation. The number of workers increased both because of the baby boomers and because of the movement of non-minority women into the labor force. The labor force/population ratio increased from under 60% for most of the 1960s to the mid 60% for much of the 1980s and beyond. Does the availability of workers (unemployment sometimes reaching over 9%) take pressure off industries to improve productivity? The government investment in computing sciences and the internet begins to pay off starting in the 80s and in full force during the 90s. This policy is as important to economic growth as the monetary or fiscal policy, but is not part of this discussion. I understand the roles of monetary and fiscal policy in short term management of an economy. However, claims of large long term effects, especially of monetary policy, struggle for clear evidence. Posted by: bakho | Link to comment | April 12, 2007 at 07:49 AM This message has been scanned for malware by SurfControl plc. www.surfcontrol.com _______________________________________________ Marxism-Thaxis mailing list [email protected] To change your options or unsubscribe go to: http://lists.econ.utah.edu/mailman/listinfo/marxism-thaxis
