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The Nation : Following Greenspan, Democratic Economists Abandon Keynesian Model

October 30, 1994|Robert A. Levine | Robert A. Levine, an economic consultant, served as deputy director of the Congressional Budget Office

As the fortunes of the Democratic Party have waxed and waned over the decades from Franklin D. Roosevelt's Administration to Bill Clinton's, one small but crucial group--liberal Democratic economists--has stood by the party. In recent years, however, while staying with their party, many of these economists have departed from their old doctrines. By doing so, they have gravely injured both the Clinton Administration and the liberal objectives they still espouse.

Since the New Deal, the Democrats have been the party of liberal economics aiming for the twin goals of prosperity and fairness. These goals made political sense and, as objectives for national policy, they were supported by a panoply of economists who advocated government economic stimulus at times of underemployment, following theories developed by John Maynard Keynes.

Lately, however, many inside-the-Beltway economists brought up in this tradition have abandoned it--just as they took high posts in the first Democratic Administration in 12 years. The leaked memorandum from Budget Director Alice M. Rivlin to Clinton, suggesting spending cuts or tax increases to reduce the deficit is the most recent manifestation of this.

The desertion cut down the central pillar of the intellectual support on which Clinton could have built his New Democracy. The flight from liberal Keynesianism, hardly mentioned in current punditry about the vicissitudes of the Clinton Administration, is at the core of many other problems. It has made powerless the tenet that should be central to modern liberalism--that government has a role to play; and it has helped make powerless the President who wanted to promote that principle.

None of this is a tocsin pealing out for the old faith by proclaiming that the President has moved too much toward the political center. Far from it. Prosperity and fairness are the issues of most concern to the middle class, and the President's problem with the middle is that he has walked away from these core interests. He has backed off every position--his fatal flaw is indecisiveness, not leftishness or rightishness.

The downward spiral began with Clinton's 1993 abandonment of his original threefold economic program--deficit reduction, economic stimulus and government investment in the nation's physical and human infrastructure. Facing opposition to the last two, Clinton abandoned them and focused on deficit reduction. This painted him into a corner that makes it near impossible to achieve any programmatic progress in this term--and so makes unlikely any hope of a second.

The 1993 story has been cast as the victory of the "deficit hawks," sober economists intent on reducing the gap between federal spending and tax revenues, over the purely political advocates of spending on the investment programs. But the common perception--that the "hawks" represented the responsible economic community, as against the irresponsible politicians--is not true.

Almost every one of the economists in the Clinton Administration had earlier espoused economic policies where stimulus took priority over deficit control. Rightly frightened by the mounting deficits of the Reagan-Bush years, however, by the 1990s they had abandoned their roots for Federal Reserve Chairman Alan Greenspan's "responsible" economics--where reduction of the deficit and fear of inflation were the operative factors.

The Greenspan position was not implausible, but neither was it unshakable. Outside the Administration, many liberal economists, including some respectable enough to have won Nobel prizes, continued to insist there was still room for stimulus in 1993--and still need for public investment. These economic arguments deserved to be heard by the President--but they were not made in the Administration's councils dominated by the Greenspan "liberals."

Greenspan, and the old and new Greenspanians, reason that: Cumulated high deficits and national debt mean deficit reduction must take priority over all other public objectives. They argue that, as put in Rivlin's memo, we must "reduce the deficit to release saving for private investment." They also say even moderate inflation is self-accelerating, and therefore any inflation will scare business and hamper growth. The goal must be zero inflation, and government attempts to stimulate growth by cutting taxes or cutting interest rates, will be inflationary and thus self-defeating.

Neither argument is "wrong," but both are partial.

First, the deficit pushes out private saving only in a fully employed economy--which we have not had lately. Indeed, much of the time, government-stimulated growth will encourage investment by increasing demand for the goods to be produced by new private capital.

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