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May 12, 2013 6:57 pm
When historians look back on the meltdown of 2008 they will conclude that the country that triggered it – the US – was among the least bad in its continuing monetary and in its initial fiscal response. What a frustration, then, that the US finds itself endlessly relitigating the debate between Keynesians and anti-Keynesians.
In the past few weeks, the intellectual tide has turned sharply towards the former following revelations of errors by Kenneth Rogoff and Carmen Reinhardt. This has been assisted by the IMF’s change of heart about the merits of short-term stimuli. Moreover, austerians, such as Niall Ferguson, the Harvard historian, continue to aid their own discrediting by dredging up the canard about John Maynard Keynes’s “childless vision” – linking his homosexuality to an alleged reckless disregard for the long term.
Yet for all the academic sound and fury, US politics is unchanged and apparently unchangeable: mild fiscal contraction is set to dilute the US recovery for at least another year. Democrats are impotent against Republican stonewalling in the House of Representatives. And Republicans can do nothing about Barack Obama’s veto – or Democratic control of the Senate. Which means we are condemned to at least another year of hypothetical fiscal debates. Here, vindicated though they may be on counter-cyclical fiscal policy, Keynesians are guilty of sins of omission.
Like Gresham’s law, the fiscal debate tends to drive out others. Keynesians want bigger deficits. The Tea Party wants smaller government. The more dominant these battle lines, the harder it is to craft ways out. New federal investment may be off the menu. But US companies are sitting on almost $2tn in cash reserves and have almost the same again parked offshore – a multiple of any possible federal investment. Public action could crowd-in private investments without troubling the taxpayer. And the resultant boost to productivity would reduce the burden of future obligations. “What we need is not bigger or smaller government for growth, but narrower and stronger government,” says Paul Romer, the growth economist.
Might there still be ways in Washington around these entrenched positions? Next week, John Delaney, a freshman Democratic congressman, will test that proposition when he launches a bill designed with an eye both on what is economically useful and politically sellable. The Rebuild America Act would give companies that repatriate foreign earnings a tax break on whatever they invest in a new infrastructure fund. Unlike a public bank, the fund would underwrite bonds to fund state, local and municipal projects – there would be no new federal bureaucracy.
It is hard to see how Republicans could object on substance to a bill that gave tax breaks to companies to improve US infrastructure. We shall see if they treat it on merit or politics. It will also be interesting to see how many other Democrats, and Keynesians, embrace its logic. Mr Delaney, who had a long career in private equity, has an accurate diagnosis of US politics. “Intransigent partisanship is getting in the way of our country having a proactive, pro-growth government,” he says. “Our tired fiscal impasse is not only a daily headache in Washington, it’s become a real competitiveness issue for our economy.”
To be sure, his biggest challenge – and that of almost any legislator taking any initiative – will be to get around the scorched-earth caucus in the Republican party, that opposes anything that could be seen as a success for public action. But there are cynics on both sides. Last month, Barack Obama appointed an industry insider, Tom Wheeler, as the next head of the Federal Communications Commission. People who have donated generously to Mr Obama’s campaigns were happy with Mr Wheeler’s nomination. Others less so.
The FCC could make simple changes to stimulate more investment in the cable and wireless sectors, which would help return US average internet speeds to the top of international tables. Mr Wheeler could also accelerate the FCC’s dilatory schedule for auctioning off public spectrum. “In just the same way that mergers result in job losses, creating and licensing multiple platforms for technology will create jobs,” says Reed Hundt, who was Bill Clinton’s highly successful FCC chair in the booming 1990s.
Defenders of Mr Wheeler say he will be keen to establish his distance from an oligopolistic industry that hired him as their advocate. They make the same argument, too, for Mary Jo White, the new chair of the Securities and Exchange Commission, who has spent her career representing Wall Street. Recent SEC moves give little cause for cheer. In isolation, bills such as Mr Delaney’s, or the rulings of federal agencies, do not match the importance, or scale, of the fiscal debate. But the US budget is stuck in the mud. And there are other sources of growth.
It is worth remembering that Keynes was a champion of the “middle way”. Yet foes, and occasionally friends, reduce him to a free-spending caricature. “I suggest that the state encouragement of new capital undertakings by employing the best technical advice ... and by lending the credit and the guarantee of the Treasury to finance them more boldly, is becoming an inevitable policy,” Keynes wrote in the 1920s. These are the thoughts of an economist looking to the long term. With the possible exception of the final clause, they are also a good description of Mr Delaney’s bill.
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