Sensible and popular Keynesians – the sophistry of Raghuram Rajan

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.

6 Responses to “Sensible and popular Keynesians – the sophistry of Raghuram Rajan”

  1. P.C Says:

    In the second paragraph, “Now in an article in the Guardian newspaper, Rajan seeks to suggest in discussing what needs…”, should ‘the Guardian’ be ‘Financial Times’?

  2. Andrew Kliman Says:

    I think he’s arguing against the “sensible” Keynesians. The title of the piece is misleading.

    He doesn’t really argue against the “populist” ones, just dismisses them at the end by saying that they “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.” In other words, massive artificial stimulus funded by massive borrowing provides no easy way out because of the long-run consequences, and saying “in the long run, we’re all dead” is a feeble attempt to ignore these consequences. Hard to argue with that.

    The “sensible” ones acknowledge that short-run artificial stimulus means “future loss of growth as the debt taken on to fund current spending is paid back,” but “bet that reviving growth through government spending today outweighs” that. RR argues that it often doesn’t outweigh that, although “[t]argeted government spending, or reduced austerity, along the lines suggested by sensible Keynesians, might be feasible in some countries and helpful in speeding recovery. But we should examine each policy based on a country’s circumstances.”

    • michael roberts Says:

      Andrew

      I take your points here that Keynesians reckon they can get a ‘free lunch’ for capitalism through government spending, or at least they can put the lunch cost on the credit card for paying back later when they are flusher. That won’t be the case, especially if the extra spending does not deliver growth as it is not in ‘productive’ sectors for capitalism. That may be what Rajan was arguing.

      But the sophistry in his piece is to distinguish between ‘popular’ Keynesians who take no account of the impact of future debt and ‘sensible’ ones that apparently do. The sensible ones are not Keynesians at all but Austerians, for this is the argument of those who reckon that more debt will not stimulate growth but the opposite. His use of sensible Keynesians is sophistry. Rajan is really arguing that nothing can be done until the capitalist sector considers it is profitable enough to invest. But to suggest that the US does not need infrastructure projects or that the unemployed could not develop new skills necessary for new projects is just more sophistry. Such projects would have an impact. but as they would be state controlled, they threaten the profitability of the capitalist sector, especially if they become permanent and even expand.

  3. Edgar Says:

    Surely the question is who pays back this so called debt? Making the rich pay more taxes would be an alternative to putting the burden on future generations.

  4. matthewrusso9 Says:

    I believe it was the leftist Vijay Prashad that wrote a book about the syndrome of right-wing Indian immigrants in the U.S., some of whom have achieved quick prominence, such as the Governor of Louisiana, considering that only a generation ago Americans only encountered Indians that were owners of cheap hotels from the Gujarat, or indirectly through exports such as cheap cotton prints or brass hookahs.

    As for “vulgar political economy”, I believe that Marx’s main point was not simply that these were apologists for capitalism and not social scientists, but that they did so by representing immediate appearance as the totality of the domain of their economic “science”. As expected, there is a handy Marx quote that I don’t have at my fingertips right now that neatly summarizes the scientific absurdity of the above proposition: If direct appearances provided the totality of possible knowledge of a subject matter, it would (tautologically) follow that there is no basis for a *scientific* investigation of the same matter.

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