Raghuram Rajan is a professor at the University of Chicago Booth School of Business, the heart of neoclassical mainstream ‘vulgar economics’, as Marx called mainstream economics – vulgar because it acted as an apologia to capitalism and was no longer an objective critique as the classical economists of Smith, Malthus and Ricardo had been. Rajan is also author of Faultlines, a book that claimed Rajan had been first to warn governors of central banks that excessive credit was leading to crisis.
Now in an article in the Financial Times, Rajan seeks to suggest in discussing what needs to be done to get the world economy going, it is necessary to make a distinction between “sensible” and “popular” Keynesians (http://www.ft.com/cms/s/2/17166454-a366-11e1-988e-00144feabdc0.html#axzz1vC0Lcu00). The sensible ones know that little can be done while popular ones are raising hopes unnecessarily.
Can we meet this sensible Keynesian that Rajan poses as alternative to a popular Keynesian? When we meet him through Rajan, he or she seems much more like the very mainstream neoclassical economists of the Chicago school that Rajan comes from. Thus the distinction he makes is just a piece of sophistry.
Apparently ‘sensible Keynesians’ recognise that demanding more government spending is counterproductive. This is because there is no mass unemployment at all in the US, but simply some pockets of unemployment left over from the housing bust areas of the US. This is poppycock and even more so when applied to vast swathes of Europe where there was no housing bubble (Italy, Portugal, Greece) and where the unemployment rate is in double-digits and the youth unemployment (not construction workers) rate has reached 50% in many countries.
Then Rajan denies that government infrastructure projects like the New Deal in the 1930s would restore employment and growth in 2012 because “today’s built-up US is less in need of infrastructure on that scale.” Really? Has Rajan not read the reports of the American Society of Civil Engineers (ASCE)? It found that one in five American bridges were “structurally deficient”. While the number of miles travelled by cars and trucks had doubled in the past 25 years, highway lane miles had risen only 45%. Demand for electricity had increased by 25%, but the construction new transmission facilities had fallen by 30%. This deterioration had lost 870,000 jobs that could have been secured with new projects, while the costs of moving goods had risen significantly. The ASCE reckoned that there was $100bn of potential work available. Instead the US Congress intends to cut such spending by 35% over the next six years. Does he not know of the crying need for a second rail tunnel under the Hudson river, or high-speed rail projects in various states? Of course, he does – this is sophistry.
Then he tells us that unemployed building workers in the US cannot switch to doing sophisticated hi-tech projects: “Moreover, it is not clear that a worker used to putting up drywall can move easily to laying fibre-optic cable.” This sort of argument was used against New Deal projects in the 1930s. It proved to be rubbish then. And it stands against the reality of how all the mass unemployed were very quickly put to work in the armaments industries in the build-up to Pearl Harbour. This sort of argument reveals Rajan’s real agenda: stopping public projects that might interfere with the interests of private capital. As he puts it: “Perhaps it would be better policy to support retraining for private jobs.”
Indeed, public sector spending not only won’t work, it is the cause of the crisis! Rajan tell us that “For Greece, government spending is the problem, not the solution.” Public sector workers have been living the life of Riley. Now with austerity, “public sector workers (can) share the private sector’s pain, (so) national solidarity could improve.” The grain of truth here is the corruption in the Greek (and Irish) political elite in supporting rich Greeks and private enterprises to avoid taxes, while public sector workers were taxed at source. Rajan’s sophistry is to connect that truth with the idea that public sector workers had an easy life compared to those in the private sector. Yet we know that Greek workers in both sectors work the longest hours in Europe, are on low wages and modest pensions, while Greek government spending as a share of GDP is relatively low compared to most in Europe (see my post, Default or devaluation?,16 November 2011).
Rajan reluctantly concedes that “Targeted government spending, or reduced austerity, along the lines suggested by sensible Keynesians, might be feasible in some countries and helpful in speeding recovery.” But he says that we should be particularly wary of populist Keynesians “who parrot “in the long run we are dead” to justify any short-sighted government action. They do the world a disservice by suggesting there are easy ways out. By misleading people and their leaders, they may well precipitate revolution rather than recovery.”
Yikes! Apparently if popular Keynesians suggest government spending as an easy way out, they risk ‘revolution’. Much better that we tell people that under capitalism there is no ‘easy way out’, only misery ahead. So we are back to ‘there is no alternative’. We are back to the TINA of the Austerians. It may be that the popular Keynesians are misleading people into thinking that some more government spending can restore capitalism to health. But according to Rajan, sensible Keynesians must instead advocate more austerity and cuts in government until the private sector recovers of its own accord. That’s neither sensible nor Keynesian.