Did rise in inequality lead to increased opposition to Keynesian stimulus?

Well, we have some more interesting extension to rising inequality in US.

Krugman and Robin Wells in this article say two main things.

  • One inequality has risen in the last few years because of polarization of politics. The politics has increasingly only heard the 1%. Hence you have policies which also help just the 1% which led to deregulation, Too Big to Fail etc. This has also been advocated by many others like Acemoglu, Zingales etc.
  • Two, the response to the crisis was muted and anti-Keynesian again because of rising inequality. The 1%ers preferred status quo and polarized politicians particularly Republicans blocked/prevented the President from helping create more jobs. The right wing has prevented the Democrat president form any major Keynesian stimulus.

Hmm. So much so, K/R say that first proposition is debatable but they are pretty sure of the second idea:

In summary, then, the role of rising inequality in creating the economic crisis of 2008 is debatable; it probably did play an important role, if nothing else than by encouraging the financial deregulation that set the stage for crisis. What seems very clear to us, however, is that rising inequality played a central role in causing an ineffective response once crisis hit. Inequality bred a polarized political system, in which the right went all out to block any and all efforts by a modestly liberal president to do something about job creation. And rising inequality also gave rise to what we have called a Dark Age of macroeconomics, in which hard-won insights about how depressions happen and what to do about them were driven out of the national discourse, even in academic circles.

This implies, we believe, that the issue of inequality and the problem of economic recovery are not as separate as a purely economic analysis might suggest. We’re not going to have a good macroeconomic policy again unless inequality, and its distorting effect on policy debate, can be curbed.

Acemoglu/Robinson in their blog post say this is an interesting extension but needs to be tested empirically:

Though intriguing, this idea is not backed up with direct evidence by Krugman and Wells. It may well be true, but it is also a curious thesis. Here are some of the things we find less than fully clear about this thesis.

First, the distinction between “right” and “left” (or perhaps pro-elite and anti-elite) is not a natural one when it comes to Keynesian economics and policies. Many conservative politicians, and not just Nixon and Reagan, have embraced Keynesian economics. Both Fascist Italy and Nazi Germany were big-time Keynesians. Work creation via government programs was a cornerstone of Nazi economic policy, so much so that an economic history of Nazi Germany by Dan P. Silverman is entitledHitler’s Economy: Nazi Work Creation Program, 1933-1936 — though Adam Tooze, The Wages of Destruction: The Making and Breaking of the Nazi Economy, argues that work creation was only a secondary objective. (See also Peter Gourevitch’s Politics in Hard Times: Comparative Responses to International Economic Crises for a comparative and nuanced picture of how political attitudes and coalitions influenced macroeconomic policies during the crisis of 1873-96, in the aftermath of the Great Depression, and in the 1970s).

Second, the argument that elites are generally opposed to government involvement in the economy reveals the very US-centric focus of Krugman and Wells. Even a perfunctory look at recent or distant history (or at our book!) should have been enough to convince one that in most societies, even in the supposedly laissez-faire 19th century Britain, elites work very hard to make the government intervene in the economy — of course, in a very specific way, to support them. It should thus be no surprise that extractive institutions are rarely built on the foundations of laissez-faire economics..

Third, even in the current US context it is not clear why the wealthiest Americans should be opposed to Keynesian policies. After all, wealthy Americans are the owners of the major corporations or at the very least are strongly vested in the US corporate sector, which would also be one of the main beneficiaries of expanded aggregate demand.

Fourth, even if Krugman and Wells’s emphasis is right, we find it hard to place lack of sufficient Keynesian stimulus as one of the most corrosive effects of soaring political inequality and political polarization in the US. What about the failure of our educational institutions; the huge incarceration rate, particularly for African-Americans; erosion of civil liberties; increasingly inefficient subsidies and tax breaks to select corporations and sectors; distortions created by implicit and explicit subsidies to the financial industry? Lack of sufficient Keynesian zeal seems a little less important.

Despite the weaknesses, something worth looking at:

Having said all of that, Krugman and Wells are probably right to some degree. Republicans prevented more aggressive Keynesian measures, and this has likely contributed to the persistence of very high unemployment (though there is no conclusive evidence showing a very large multiplier from government spending, which is something that needs to be factored in). All the same, the reasons for this hostility to Keynesian economics are still mysterious. Perhaps it was just politicking, with small p — a way of frustrating Obama’s economic policies. Perhaps it was based on a “slippery slope argument” — if the government starts being active now, what is there to stop it from becoming even more active in the future? Perhaps and just perhaps, it was for the same reason that some economists had a blanket opposition to Keynesian policies — on “ideological” grounds not clearly based on pure economic interest. Not as big a story, but a possibility.

 Henry Farrell argued in a paper saying there was some acceptance to Keynes in the first  phase of the crisis and then in 2010 it was a complete shift. This was basically because of rise in views of ECB and European econs which resulted in the shift of thinking.
Many interesting research themes emerging..
Addendum:
From Krugman’s article I learnt Keynes General Theory was named as one of the most harmful 10 booksof 19th and 20th century:

The tradition continues through the years. In 2005 the right-wing magazine Human Events listed Keynes’s “General Theory” among the 10 most harmful books of the 19th and 20th centuries, right up there with “Mein Kampf” and “Das Kapital.”

This is amazing. Keynes and Marx books listed with Mein Kempf!

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