Monday, April 13, 2009

Re-Post Number 5: " WPA and Keynesianism - Theory and Policy of Public Employment" (August 13, 2007)


The following post continues in the trend of moving from the technical aspects of public employment policy to the intellectual aspects of public employment policy. Here, I show how public employment policy both fits and doesn't quite fit within the boundaries of Keynesian economic theory.


In my last diary, I wrote about the differences between public employment and public works, and the implications for current and future policy. Today, I’m going to talk about the relationship between Keynesian economic policy and public employment, and what lessons we can draw from this.

First, a quick definition of terms:

Public Employment – as has already been talked about, public employment is the policy of the government directly hiring people who currently are unemployed for the purposes of reducing unemployment, increasing purchasing power, and secondarily creating public goods and services.

Keynesianism - is a bit more complicated, and as a non-economist, I’m not really that qualified to talk about it (I have read the General Theory and several books about the historical impact of Keynesian theory on public policy, but I haven’t taken any courses on Keynesian economics). But to present just a simplified version of John Maynard Keynes’ theory, and the public policy that resulted from it:

* First, Keynes argued that classical economists had misunderstood key aspects of wages and prices. As he argued, the idea behind Say’s Law – that supply creates its own demand, and that therefore the economy is always at an optimum equilibrium – was not right. The level of production and employment in an economy at any given time was not determined solely by the individual calculations of capitalists regarding their own prices and wages, but was profoundly shaped by aggregate or effective demand. Essentially, Keynes was arguing that you can’t sell stuff without there being enough people with money to buy it.

* Second, Keynes argued that, contrary to the advice of orthodox economists at the time, slashing wages (both to cut costs and to increase willingness to work) was not the answer to the Great Depression. Rather, he argued that cutting wages also cut effective demand for goods (how much people are actually able to buy, versus how much they’d like to buy) – which cut profits, returns on investment, and any expansion of the economy those things would create. Essentially, Keynes was arguing that protecting profits at the expense of workers would make things worse.

* Third, Keynes argued that people are not as economically rational as classical economists would like to believe – that people have psychological reactions to the economy. To begin with, he argued that when wages and prices fall, people hold back from spending their money because they expect them to keep falling. Next, he argued that people have a preference to save more money than they need to – and that in a recession or a depression, people hold onto their money because they’re afraid that if they invest it, they’ll lose it. This leads to insufficient demand and insufficient investment that prevents recovery. Essentially, Keynes was arguing that economies could "stabilize" at levels far below their normal levels of "full" employment and investment – meaning that economies wouldn’t just get better on their own.

* Fourth, Keynes argued that the government was uniquely able to repair this situation, if it acted in an organized fashion. First, by using its power to tax and borrow, the government could bring the money that had flowed out of the economy (when people sold off stocks and bonds and emptied out their bank accounts( back into the economy. Second, by spending even at a deficit, the government could increase demand, investment and profits, "pump-priming" the economic recovery. As long as the government acted in a counter-cyclical fashion – borrowing and spending more in recessions, and increasing taxes and spending less when economies threatened to over-heat – they could stave off economic downturns. Essentially, Keynes was arguing that governments could and should manage their economies and create economic stability and prosperity, by acting in a counter-cyclical fashion.

Keynesian economics was probably the most influential economic theory for the broader left-of-center, both in the U.S and in Europe, other than Marxism, of the 20th century. For New Dealers and members of the British Labor Party, and even for more moderate or conservative people like Henry Luce of Time Magazine, Keynesian economic policies seemed to offer a solution to all of the problems of capitalism, the constant booms and busts, and in exchange provide perpetual prosperity. Moreover, Keynesianism offered this solution as a resounding affirmation of public action – not only was perpetual prosperity possible, but it would be governments, not the private sector, that would provide it. Keynesianism quickly became one of the cornerstones of liberal and progressive public policy.

How does this all tie in with public employment? Well, to begin with, public employment advocates shared many of the beliefs that Keynes held – that the problem of the Great Depression was that there was insufficient demand for goods (what public employment advocates and other New Dealers called insufficient purchasing power), that governments could act directly to reverse this, and that the way to end the Depression was to spend a lot of money to increase demand. As Harry Hopkins and the people who worked for him in the WPA argued, public employment was a proven way to spend a lot of money very fast, that the money flowed straight into the pockets of working class people who had lost their purchasing power (and therefore, their ability to translate their potential demand for goods into effective demand) when they lost their jobs. Hopkins and the administrators of the WPA and similar programs became enthusiastic advocates for Keynesian economic theory and Keynesian economic policy, using the ideas of Keynes as justification for increasing federal spending and the budgets of the WPA and similar programs.

Now, one of the most important divisions in WWII-era liberalism became a key issue. Liberals who favored Keynesian theories nonetheless disagreed over how to implement them into public policy and split into two camps: fiscal Keynesians and social Keynesians.

Fiscal Keynesians focused on Keynes’ arguments about the importance of interest rates (and spending) on economic recovery, and argued that you could implement Keynesian policies through the "fisc and the fed" – the Federal Reserve and the normal spending of the government (with a strong preference for using interest rates before spending). Essentially, the government could indirectly manage the economy by lowering and raising interest rates appropriately, thus stimulating investment (and ultimately jobs and economic growth). If necessary, the government could increase economic spending, but that should be a last resort and in any case done through more traditional channels such as tax cuts or contracts. This would allow for economic management with a minimum of interference with the free market – the government wouldn’t have to grow or spend money for "socialist" programs.

Social Keynesians emphasized much more strongly the importance of spending and a larger government presence in the economy, including regulation of corporate behavior. In their view, the kind of spending was important in and of itself – government had to spend money in ways (preferably through government programs) that directed the money to working class people who lacked purchasing power, as this would have the broadest impact on demand; moreover, the private sector on its own would never provide the kind of full employment needed, so the government would have to intervene on its own (by providing public employment and constructing public works, by supporting unions and by establishing min. wages and max. hours laws); finally, social Keynesians argued that the government shouldn’t just spend more money in the same way that the private sector did – government spending should flow to areas and people that the private sector neglected, providing things like housing for the poor, health care, and social security benefits.

Naturally, public employment advocates were fiercely committed to social Keynesianism, since it was the theory closer to their own beliefs – although public employment advocates did argue that, beyond issues of increasing economic demand by spending, public employment further showed that the government could modulate key economic variables like the unemployment rate directly. This all came to a head in 1945-1946, when the Full Employment Act was introduced into Congress.

The original draft of the Full Employment Act was a strongly social-Keynesian piece of legislation. The bill proposed to formally commit the United States government to achieving full employment as a matter of standard economic policy, and to establish for all Americans the "right to a job." (At the time, most government officials and Keynesian economists believed to be somewhere between 1-2.7% unemployment, since there would always be some people who were in-between jobs, not working because they were in school or caring for a relative, etc.) Further, the bill required the President to submit a "Full Employment Budget" to Congress each year, in addition to the normal federal budget – this budget would provide an estimate for the employment rate for the next fiscal year given current trends, and if that rate was lower than full employment, to recommend the necessary policies and spending levels to reach full employment.

However, the bill was considerably watered down as it passed through Congress, in response to the concerns of conservatives and moderates who disliked the idea of government economic planning or creating the "right to a job" and the concerns of fiscal-Keynesian liberals who believed that such measures were unnecessary. The final Employment Act that was passed by the Congress and signed into law by President Truman was a much more fiscal Keynesian bill. In this version, the government declared that it would seek to "promote maximum employment, production, and purchasing power" without committing itself to achieving them, and the right to a job was stricken from the text. The Full Employment Budget was reduced to an annual economic forecast and a list of suggestions that neither the President nor the Congress was obligated to pay attention to much less enact into law. In no small part because of this defeat, social Keynesianism became rapidly eclipsed by fiscal Keynesianism, which solidified its status as the dominant theory of post-war liberals, especially in the Kennedy and Johnson years (for more on the importance of this, see Judith Russell’s book, Economics, Bureaucracy, and Race on the influence of fiscal Keynesians on the Great Society and the War on Poverty). The WPA, which had outlasted many New Deal programs and remained in operation through 1942, was not revived after the war.


So, what are the implications for progressives today?

First, ideas matter. Public policies are immensely strengthened when they have theories that explain why and how they work, and why they are a good idea; they are likewise weakened when those theories are eclipsed by theories which explain why they are inefficient, unnecessary, or counter-productive.

Second, compromise has consequences. The decision to opt for fiscal Keynesianism over social Keynesianism had a major historical impact, both for liberal politics and policy and for the country at large. Social Keynesiansm was effectively halted for (by this point) sixty-one years. And this meant that in the 1960’s, the people who designed the Great Society and the War on Poverty excluded large-scale public employment in favor of education, social services, and job training – which limited the impact on poverty and unemployment, especially among the young and working-age people. It also meant that when fiscal Keynesianism stopped working in the 1970s and came under assault from Milton Friedman and other neo-classical economists, that liberals had no alternative policy to guide them. Notably in the 1960’s, one of the chief demands of the civil rights movement was for full-employment through public employment – the "Freedom Budget" promoted by A. Phillip Randolph and Martin Luther King Jr. was a major part of the civil rights movement’s platform, and the famous March on Washington was titled the "Jobs and Freedom March," as photographs of signs carried by participants attest to.

Third, when options are closed, so are imaginations. When fiscal Keynesianism became dominant, both experts, public officials, and voters alike were convinced that the most that government could do was to tinker around the edges of the American economy. Today, we’ve restricted ourselves even further, such that in 2004, when Democratic presidential candidates spoke of the need to "grow jobs...make jobs," all they could think of to do so was to create tax credits and funds to lend money to businesses. Hopefully, by using history to remind ourselves that the options open today are not the only options available, we can begin to reverse this.


EDIT: Damn, can't believe I forgot to add this point. In a previous diary I had mentioned that John Maynard Keynes was one of those who had missed the difference between public employment and public works, and I had intended to explain myself here.

In many writings and speeches before and after writing the General Theory, Keynes had argued that one of the key ways that Keynesian policies could be implemented was to use public works to lower unemployment. One of the objections to this policy, and indeed one of the experiences of later implementing these policies, was that public works failed to produce enough employment. This was used by conservatives, especially during the 1980s, that using the government instead of the free market was a bad idea.

The historical irony here is that the public works programs were being blamed for something that wasn't their fault - public works directs most of its money towards the works themselves, purchasing materials and land, purchasing machinery and equipment, and what employment it does generate tends to go to people who have experience in construction, which tends to be people who are already employed. By providing extra jobs to construction and general contracting firms, public works does increase employment around the margins, when these firms hire on extra workers to meet the increased need, but it's really not large enough an effect to provide the reductions in unemployment that Keynes was looking for.

So, the point I'm trying to make here is that progressives need to be very careful about what policies we support and why - clarity of theory and practice is really important. Supporting a program because it's intrinsically worthy is all well and good, but we have to be sure that they will have the effects desired, otherwise our opponents will use the results as a weapon to attack the basic idea of government action.

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