Brad DeLong, Peter Orszag: Keynesians?

The contrast between the quasi-revolutionary thoughts and conclusions of John Maynard Keynes and the writings of the current crop of self proclaimed Keynesian economists is staggering.

Keynes saw

“(t)he outstanding faults of the economic society in which we live are its failure to provide for full employment and its arbitrary and inequitable distribution of wealth and incomes.”

And here are some of his policy recommendations:

1. The “euthanasia of the cumulative oppressive power of the capitalist to exploit the scarcity value of capital”;
2. A choice should be given to holders of wealth: consume or order production of a capital asset.  Investment should be comprehensively socialized  – “the duty of ordering the current volume of investment cannot safely  be left in private hands”;
3. The rate of interest should essentially be reduced to zero.  “Interest today rewards no genuine sacrifice, any more than the rent of land”.
4. We should concentrate almost solely on domestic employment rather than foreign trade.  Foreign trade is a “desperate expedient to maintain employment at home by forcing sales on foreign markets and restricting purchases”.

Do you hear anything remotely like this from those who claim the mantle of Keynes – from economists such as J. Bradford DeLong, Peter Orszag, Paul Krugman, or Joseph Stiglitz?  The answer is a resounding NO!  That they call themselves Keynesian is downright Orwellian.  Let’s look today at DeLong and Orszag.

DeLong quite proudly calls himself a neo-liberal, as per this quote from 1999:

Now I am a card-carrying neoliberal: a believer that a bet on increased international economic integration is our best hope for rapidly moving to a truly human world, an advocate of NAFTA and GATT, a former not-very-senior official in the Bentsen and Rubin Treasury Departments, and a believer that those fighting to hold back world economic integration are or are the dupes of foes of global prosperity and liberty.

This is without doubt the neo-liberal view and it’s as far from Keynes as possible, both in terms of foreign trade and in terms of trust in the benign nature of concentrated wealth.  The results of an expanding open world market are quite predictable given the laws of economy of scale: rising concentrations of huge conglomerates, oligopoly, increased worker competition, reduced scope for state based welfare programs, and wealth inequality.  12 years have now passed since the above quote and the results would appear to be in: higher concentration of wealth, less power for workers, and stagnant or declining living standards.  So, here’s DeLong in 2010 explaining his world view:

The financial rich are overwhelmingly the patient risk-bearers. The financial poor are those who sought safety, or who were unwilling or unable to hold their positions and wait for fundamentals to reassert themselves. Leverage then becomes a way of taking the money of the risk-averse of whom the market has too many–for that is what low long-term returns on “safe” portfolios tell us–and putting it too work in the hands of the too-few who will use it to take the long-term risks that the market, historically, has always handsomely rewarded. And financial sophistication becomes a way of concentrating and amplifying the rewards of risk-bearing to call forth additional risk-bearing capital to bolster the numbers of the too-few.

This could be pulled almost verbatim from the 19^th century.  Our economy should be based on the leveraged risk taking of the rich!  Has DeLong even read Keynes?

Finally, DeLong “grasps reality with a sharp beak” today:

Tom Gallagher, by contrast, seems to me to at least get his finger on a piece of the problem when he writes: “[W]hat the economy could use is a debate over medium-term entitlement and tax changes.

What is the solution to our long-run deficit problem? It is simply this: … “Elect representatives who will not pass unfunded tax cuts” … “Elect representatives who will not pass unfunded spending increases” … “Elect presidents who will promise at the start of their turns to veto legislative acts that do not meet long run paygo requirements.”

DeLong thinks the answer is simple.  But what if a near balanced budget doesn’t provide full employment?  This after all was the major problem Keynes sought to solve.  We need a debate on entitlements?  What does that mean?  That health care benefits need to be reduced or social security, which averages just $1,177 per month, is too generous?

Bottom line: J. Bradford DeLong is not remotely a Keynesian.

Let’s move to Peter Orszag, an establishment democrat through and through.  He’s a Visiting Fellow at the Council of Foreign Relations, a contributing columnist for the New York Times, former Deputy Director at the Brookings Institute, and former Director of the Office of Management and Budget under Barack Obama.  Revealingly, he is now a Vice Chairman of Citigroup.  Orszag wrote an outlandish article today in the Financial Times entitled “Chance can be a better way to save”.  That an influential economist of the “center-left” could write such irrelevant nonsense reveals quite clearly how far removed the economics profession is from the general population.

Orszag decries the low savings rate in America and seeks to find a way to increase it.  Sitting within the glass towers of Citigroup, he demonstrates a complete inability to address the fundamental issues that are involved and a total alienation from Keynesian thought.

First off, Orszag claims that national savings will accrue mainly from reductions in the budget deficit.  But isn’t this diametrically opposed to what is perhaps the most important Keynesian insight – that savings can only arise from the act of investment?  One can either spend or not spend; “savings” is “not spending” and it does nothing more than create unemployment and austerity.  Reductions in government spending cannot possibly result in increased “savings”.  Orszag’s a hawk on the deficit but he ignores the reality that we have a fiat currency and have no need to borrow in order to spend.  Like DeLong and nearly all economists, he’s addressing a fake and contrived problem.

But this aside, his idea for increasing the savings of the “lower and middle income groups” is, incredibly, to provide them with a savings account that contains a lottery ticket.  Here are his thoughts:

“Low-income families, in particular, spend a higher share of their income on tickets.”  “One reason for their enduring popularity may be that lotteries offer a (highly improbable) chance for a massive increase in wealth otherwise unavailable to poorer families.”  “Research suggests that winning the lottery produces only an ephemeral increase in happiness, but that’s not how it seems before winning.”  “In the quest to raise saving rates, this allure of lotteries may be quite helpful.”  “… a lottery-lined savings account could offer a lower rate of interest, but also say a one-in-a-million chance of winning $1m for each $100 deposited. Mathematically, the expected return is the same, but the chance to win $1m makes the account much more attractive.”

In short, in the coming decade we need a comprehensive effort to raise household savings. As part of that push, let’s give savings accounts linked to lotteries a chance. It is a gamble, but it could well pay off handsomely.

We are in an era of historic inequality.  The reason the poor and middle class cannot save is that they aren’t sharing in the wealth they’re producing.  It’s all going to the well placed few, many of whom sit with Orszag on Wall Street.  The only way to increase the lower group’s savings is to provide a fairer distribution of income and wealth.  That a high placed economist could seriously suggest such a silly and worthless proposal as a lottery is a very sad commentary on our times.  But in a warped sense Orszag’s idea isn’t too off target – modern capitalism is after all little more than a great casino, why not extend the slot machine to the whole population?

And finally, as an aside, we shouldn’t miss the fact that Orszag’s observation that increased wealth doesn’t provide a significant increment in happiness is extremely damaging to the greed based human motivation theory that’s at the very heart of mainstream economics.  Sadly though, this apparently unintentional droplet of wisdom is completely lost in an ocean of nonsense.

Can we visualize Keynes writing that we need to promote global open trade and capital mobility, maximize leverage and reward for the wealthy few, reduce entitlements, balance the budget, or provide lottery tickets for the lower and middle classes?  It’s beyond absurd.  Keynes is turning over in his grave.