Paradox of Thrift, the Deficit Debate and Virtue Ethics

An economist friend of mine pointed out to me that my post on the intersection of ethical dynamics and economics omitted to mention the “paradox of thrift” brought to the attention of 20th Century economists and theoretically elaborated by John Maynard Keynes.  In fact, my friend felt that the post was mostly about the paradox of thrift yet I had neglected to mention it or credit Keynes.  While it may have been a significant oversight on my part, I disagreed with his premise that that post or my position was largely about that paradox.  I explained to him and will explain here the differences between a simple observation of the paradox of thrift as it operates in contemporary economics and my approach.

The Paradox of Thrift Summarized

The paradox of thrift is a phenomenon whereby if everybody in an economy attempts to increase savings (thrift) and these savings are not in investments but in liquid assets, overall savings and economic growth goes down;  individual virtue collides with overall social well-being.  There are many good explanations of the paradox of thrift which, as Wikipedia includes in its entry on the subject, goes back to biblical injunctions against a propensity to save rather than spend.  Various pre-Keynesian economists including Bernard Mandeville commented on the paradox.  During the Depression, Keynes elaborated the paradox by introducing the notion that governments should stimulate demand by government deficit spending on projects that put money back into the economy.  The stimulation of aggregate demand would counteract the tendency of individual economic actors to save out of fear during an economic downturn.  Richard Koo’s “balance sheet recession” is an example of the paradox of thrift.

The Paradox is based on Keynes’s observation that people have a propensity to prefer liquid assets over commitment to investments that “tie up their money”.  The liquidity preference is a fundamental problem for economics, where overall wealth is based on longer-term investments in productive goods and in the demand by consumers for the products produced by capital goods.  Under conditions of uncertainty and fear including in economic downturns, this liquidity preference is enhanced.  We appear now again in a “paradox of thrift world” according to Paul Krugman and others.

Anti-Keynesians, Deficit Hawks View the Acknowledgement of the Paradox as Itself a Vice

While Keynesians accept the paradox of thrift as a fact or periodic objective condition of the economy, especially in an economic downturn, the struggle between economic schools inside economics has meant that this observation is not accepted universally as a fact of life.  From a Keynesian or Keynes-influenced perspective, the deficit hawks, who of necessity must overlook or downgrade the Paradox, are simply out to lunch, ignoring a fact of life (if everybody tries to increase savings under conditions of weak demand, total savings and wealth goes down).

However there are those anti-Keynesians of various stripes, including followers of the Austrian school, who believe that Keynesianism and its acknowledgement of the paradox are essentially incitement to violate the economic virtue of saving.  They see this, whether in honesty or as a political pose, as a moral war between two conceptions of virtue or rather to them, a war between a virtue and a vice.  Mandeville in the 18th Century and Keynes in the 20th century were faced with scandalized reactions to this observation, though in the case of Mandeville, a fairly consistent anti-moralism and commitment to self-interest helped inflame the reaction to what might have been sound economic advice.

Thrift is Not the Only Economic Virtue

While thrift is considered, in a post-Calvinist world, to be a primary economic virtue, and was praised by Adam Smith the founder of modern economics, and Ben Franklin, it is not the only virtue.  As implied above, anti-Keynesians think of Keynesians as promoting spending as a virtue, though as I will argue below this is only ambiguously the case.  Giving to charity is considered by many to be an economic virtue, and corporations and individuals often display their charitable giving to gain benefit from the perception of this virtue.  Nowadays, “going green” or efforts to work towards ecological sustainability are considered to be virtues, which many show off to others, as a means, in part, of gaining social status, as well as an educational tool.

Anything that can be said to be a stable or inherent characteristic of a person or a corporation can be taken by some economic actors to be a virtue or vice and either compel attraction or repulsion.  Thus a structure of a virtue ethics involves the evaluation of these presumed stable or inherent characteristics as either positive (promoting attraction or approbation) or negative (promoting repulsion or condemnation).  Unfortunately, and this may seem a stretch to some, the use of racial preferences and prejudices works very similarly to virtue ethics in this regard:  people do business with people from one or two ethnic groups as a preference over others or avoid doing business with one or two or more other members of other ethnic groups.  Virtues, of course, are subjectively evaluated, so for some, a preferred ethnic group may be a shunned one, but nevertheless the same structure of attaching value in both positive and negative form to an inherent, though not necessarily lifelong, characteristic of an individual or organization is occurring.

Virtue Ethics Is a Way of Seeing the World

The foregoing is an effort to show that virtue ethics is a meta-ethical way of seeing the world that in turn shapes more specifically economic paradigms and is highly influential within professional economics.  A paradigm, as defined by Thomas Kuhn the historian and theorist of science, is a way to look at the world that frames that world so as to be meaningful to scientists or other observers.  For Kuhn observations of the world entail or imply some form of a framework.  Some facts or features of the world will appear to be unimportant or even invisible from within one or another paradigm.

Those economists who see their jobs as the inculcation of virtuous habits in people and groups of people, will tend to look for and praise characteristics of people, governments or organizations that to them exemplify these virtues while criticize or even excoriate the same actors who do not exhibit these virtues or display their opposites.  They may view their task as objective observers and interpreters of the world, but where there is uncertainty, ambiguity, and the need to evaluate or project into the future they are likely to view the economy as something like a morality play between good and less good or even bad actors.

Thus in the struggle over deficit spending and the paradox of thrift, defining the economy as largely enacted by people with varying levels of virtue, especially as regards the virtue of thrift, emphasizes inherent or supposedly inherent characteristics over what might be systemic and situational issues.   The various deficit commissions and other organizations that are creating or trying to create an atmosphere in which statements of personal virtue or the economic virtue of entities (using the value of thrift and the responsible borrower as primary virtues) are signs of “responsibility”, are almost exclusively wedded to a virtue ethical way to parse the world.  Critics of their perspective usually point to a system or specific history which they are misinterpreting or missing altogether.

What Isn’t a Virtue Ethics in Economic Meta-Ethics?

As I noted in the previous post , economists have the choice of at least three meta-ethical frameworks to organize and evaluate the social data which they collect and organize into a perhaps part-scientific, discourse that applies valuations to its findings:  these valuations implicitly use some admixture of utilitarian, deontological, and virtue ethical frameworks.

Keynesianism, which is itself a broad and unsystematized climate of opinion, does not build itself up as a virtue ethics, and, in fact with Keynes’s observations of the effects of virtue ethics in the paradox, shuns the ascription of stable inherent characteristics in economic actors, to which values are attached.  The meta-ethics of Keynesianism might be construed as a “systemic, behaviorially-based utilitarianism with a varying deontological commitment to full employment”.  Keynesians attempt to weigh and measure various human attributes that effect economic behavior and attempt to figure out how economic policy can be designed to achieve full employment at any given juncture.

While the broadness of Keynesianism (if we include post-Keynesianisms, neo-Keynesians, new Keynesians, etc. in this category) is a scientific and political problem across the board, those Keynesians that remain most “technocratic” run particular political risks in avoiding the emotive cores of virtue ethics and deontological commitment to universal or popular rights.  A systemic utilitarianism based on numerical representations of utility is a particularly “dry” affair for most non-economists; in the case of the deficit debate standing up for continued deficit spending in the interests of maintaining “aggregate demand” is not particularly inspiring rhetoric.  On the other hand, a “left” Keynesianism, which is mostly absent from the center of the public debate, draws on deontological commitments to “decent jobs” or environmental integrity as a means of inspiring at least some political support for its agenda.

In the current political climate, which is dominated by neo-liberal values that tend to place responsibility on the individual rather than society, it is easier to evoke and maintain a political consensus around an individualized virtue ethics.   Concerted efforts would need to be made by Keynesians to defend themselves politically, most probably evoking some form of a deontological commitment to overall social welfare and to good work with adequate wages.  Though there are exceptions, the declaration of commitment to this type of values with manifest emotive basis has not, for the most part, been forthcoming from either the economic profession nor political elites.


The America Speaks Town Hall Pt. 2: Implications for Folk Economics and the Politics of the Deficit Commission

In the first part of this post, I described what I thought were the most important aspects, events and results that emerged from the 7 hour June 26th AmericaSpeaks Townhall which I attended at the Silicon Valley site.  In my account, I attempted to include aspects of the experience that contradicted some of my preconceptions as well as those that confirmed them.  I obviously am a partisan observer, with a clear interest in not allowing budget fears or fear-mongering to reduce the already minimal welfare state that we have in the US as well as with the future-looking projects related to oil independence and climate change which would depend in part on deficit spending.  However, I don’t want to simply reinforce my biases in this account because I learned from the experience without fundamentally reversing my overall view of the intensified campaign against budget deficits at this time.

Two Folk Economic “Layers” at AmericaSpeaks/Deficit Commission

The AmericaSpeaks event is an example of folk economics on two levels, one of them more problematic than the other.  On the one most obvious level, the event itself was organized as a event where ordinary citizens were supposed to apply their values and understanding to the macroeconomic question of reducing the federal budget deficit.  So this was an invitation to engage in folk economics.  As almost everybody is affected by economic decision making, it makes sense to get people involved to try to educate them and get their opinions about these issues.  Also, as I have claimed here, professional economics can never replace folk economics, so formalizing the relationship between folk (or popular) economics and professional economics makes sense.

On the second level, which may be more controversial, AmericaSpeaks was communicating a vision of how the government spends money that corresponds largely to one political/folk economic view of government spending rather than one that is fully in tune with all of the tools of professional economics.  While James K. Galbraith is an economist who is decidedly left of center, he provides in an article in Huffington Post a rather detailed vision of how the deficit commission is overlooking key aspects of how governments that control their own currencies actually spend money and manage deficits; these details are entirely absent from the AmericaSpeaks materials.  Also Paul Krugman, again left of center, points out that the economic framework within which those who prioritize cutting budget deficits work, rests on worries about future events and fears of disapproval in the bond market about the solidity of US government debt for which there are no current signs and attention to which doesn’t seem to help countries like budget-slashing Ireland reduce their interest rates.  Furthermore, the notion that deficit reduction is a primary concern at this time, ignores what many of the leading American macroeconomists are focused on a still anemic American economy with massive private indebtedness.  Trade deficits are also left out of the picture.  Within the world of AmericaSpeaks then, a folk economic vision that ignores much of what concerns professional macroeconomists is presented as the primary economic task of the American people (“Our Budget, Our Economy”).

The most ardent supporters of the AmericaSpeaks townhall or the work of the budget deficit commissions might object that these economists are of a different or outside-the-mainstream political persuasion.  While some of these economists are left of center, the premise of any science and the meta-economics project is that we are looking for the best explanations that account for the broadest and most relevant data-set available no matter their political provenance.  If some economists on the left have a better theory of one phenomenon or another, an economic science should take complete account of their theories rather than cast economic analyses and differences of interpretation as purely a political contest by other means.

The Political-Economic “Frame” and Timing of the Townhall (and the Anti-Deficit Campaign)

Many of the critics of the anti-budget deficit campaigns point out that the organizers of these events and the politicians who are most enthusiastic about cutting deficits are paying attention now to budget deficits rather than when their closest political allies (Republicans like George Bush) were in office.  The American “deficit hawks” seem most worried when someone from the centrist to left leaning Democrat Party has decision-making power , a group which they may feel they have less political influence over, therefore requiring the manufacture of or intensification of  pre-existing fears about deficits to rein in a less secure political ally.  Spending on military adventures and hardware, as well as bailouts demanded by their powerful economic allies are apparently not so troubling to these budget hawks, even if, in particular, those same bailouts are now ideological targets for Republicans after the fact.

The issue of timing of the budget deficit scare is not only political but economic.  Most explanations of the 2008-9 economic crisis emphasize the role of private debt both consumer and commercial which helped inflate the asset bubble that punctured in 2008.  Some Wall Street firms were leveraged 30 to 1 (had 30 times more debt than assets) while consumers and homeowners have never been so indebted in the US and in some other countries.  A similar phenomenon occurred before the Great Depression, when a similar debt-fueled asset bubble burst.  If those in the private sector who were co-responsible for the downfall or at least benefited greatly during the asset bubble and during its bailout, might have a vested interest in distracting from the bad debts and mishandling of debt in the private sector by focusing on public debt as the prime evil in our economy.

The counter-argument that is mustered against this line of thought common mostly on the political Right and in the now-opposition Republican Party is that quasi-public agencies like Fannie Mae and Freddie Mac, as well as pro-homeownership policies by the Bush and other Administrations distorted the operation of free markets which would never have allowed so much bad debt to accumulate.  While there is some plausibility to the idea that the presence of a government that was willing to bailout firms increased risk-taking, to “blame” government guarantees alone overlooks the active and aggressive means that private businesses leveraged themselves up and encouraged government to look the other way.  Furthermore, these objections to government guarantees were, for the most part, not forthcoming from Republicans when powerful corporate donors were reaping profits from favorable policies.  Military spending, wars and tax cuts for the rich were also not part of the concerns of these political deficit hawks in general, all of which have increased the federal budget deficit.

Scapegoating Gullible Politicians, Government and Public Budget Deficits

While Republicans are favoring a focus on public debt, the role of private debt either within the financial system, corporate America or of the American people as a whole, falls almost entirely out of the framework set in motion by the focus on public debt and fiscal deficits.   The formulation of the AmericaSpeaks townhall “Our Budget, Our Economy” suggests that contrary to the economic wisdom of the last thirty years, suddenly government budgeting forms the economy, conveniently when that economy is deeply troubled;  in the dominant market fundamentalist ideology beloved by supporters of budget cuts, the government is usually pictured as the impediment to “The Economy”.  Nowhere in the AmericaSpeaks proceedings was the role of private debt even mentioned and furthermore, and perhaps gleefully, the two Republican Senators (Domenici and Gregg) were attempting to re-write history by suggesting that our current economic situation is due to public deficits when only the most ideologically motivated economists could find a link between public budget deficits and the economic downturn of 2008-9.

Furthermore and most damagingly these efforts are made in a society with a very poor public information system/news media, a short memory, and a public discourse that is biased towards stories that emphasize the positive and tend to shy away from the negative aspects of life.  There is consequently a tendency to “ball together” all negatives in one location, be it demonic forces or, more recently the government.  These efforts to conflate all “evils” (debt, profligacy, and government together) are part of a political move that the rather credulous Obama Administration has allowed itself to be maneuvered into.   The public’s grasp of economics, let alone politicians’ grasp, cannot in the context be expected to be able to make distinctions between public and private debt or their dynamic roles in the economy.  The government can be used as a whipping boy or a sacrificial lamb, for these ills especially in the wake of neoliberalism, the ideology that maintains that markets represent economic virtue and government, economic vice.

It would seem that government and the party that believes to some degree in governing in the US, the Democrats, have been placed in the position of being made responsible for the  negatives in the American economy by the push to blame public debt and deficits for most of societies’ ills.  Why they would allow themselves to be put in this position is an interesting question, which I would partly attribute to a lack of understanding of both the deeper cultural and even psychological dynamics that animate American politics as well as a lack of a deep understanding of the economic dynamics of the Great Crash of 2008.   Republicans have been only too willing, including Sens. Gregg and Domenici, to entrap these compliant Democrats with falsehoods or implied false connections between budget deficits and our current economic distress.

Meta-economics, Folk Economics and Ethics

Unfortunately I have not yet had the time to make a formal introduction of one of the key rationales for building a meta-economics: exploring in a systematic way the interaction of certain aspects of philosophical and practical ethics with economics.  The timeliness of the budget issue and the material from the AmericaSpeaks townhall should not bias this discussion in this context:  I will write a more inclusive introduction of the topic shortly.

Nevertheless one of the entry points for ethical concerns in economics has been folk or popular economics, where people attempt to blend their own personal ethical concerns or viewpoint with their view of how the economy does or should work.  As an example of organized folk economics, the AmericaSpeaks “Our Budget, Our Economy” meetings attempted to link ethical concerns to its mission to mobilize people to become involved in the budget deficit cutting discussion.

While I am supportive of developing an economics that is responsive to ethical concerns, within “Our Budget, Our Economy” as I highlighted in part one, these concerns were introduced in a way that activated moral conflicts in a manipulative way, violating some precepts of what might be called a scientific economics, especially as regards public spending.  Most troubling was the first “Values” polarity on one of the worksheets where caring for the current generation was played off against caring for future generations.  There are areas of the economy (climate change and fossil fuel use) where there is quite a stark conflict between the interests of the current generation and future generations but in the area of budget deficits at the current conjuncture this polarity is not a guide to meaningful action (for instance the proposal favored by many deficit hawks to raise the age of eligibility for Social Security due to budget concerns would mean that older workers would compete longer for jobs with younger workers).

The implication in this polarity is that concern for future generations is equated with cutting deficits and therefore denying oneself services, while presumably, supplying similar levels of social services is considered to be anti-thetical to this highest ethical goal.  An elaborate, potentially fraudulent, misappropriation of people’s more noble ethical concerns were thus mobilized for those who did not have either sufficient economic instinct or economic scientific background to note this false choice.   Put another way, if the current generations are immiserated future generations aren’t put at advantage or may not come into being in the first place.

Furthermore, there is a similar and quite sinister political sleight of hand that recalls the obscuring of public and private debt in the deficit discussion as a whole.  Individuals went into private debt in the last two decades to either supplement meager earnings (or earnings that were assessed as too meager) or sometimes to indulge in various luxuries.  Financial firms went deeply into debt in pursuit of very high profit margins.  By contrast most of what seniors and poor people use social insurance for (SS, Medicare, Medicaid) are for the absolute bare necessities and the payments are often insufficient for that.   The period of the 90’s and 00’s could be viewed by some luckier people as a time of foolish excess in their lives for which they feel the need to repent in some way.  The current form of expiation for these sins is viewed as concern about budget deficits, which is a political and psychological “displacement” from looking at excessive debt in the financial sector and in people’s personal budgets.

By contrast resolving our current PRIVATE indebtedness via growing employment in productive industries and solid investment strategies is difficult, complex and requires a large-scale re-birth and restructuring of the American economy.  This will probably involve confrontations with powerful interest groups, a difficult passage from to investment in paper assets to investment in productive assets, as well as genuine self-searching about one’s own values as they apply in the private economy.

Potential Political Uses of the “Our Budget, Our Economy” Townhall

As Catherine Lukensmeyer, the CEO of AmericaSpeaks reminded participants, the funders have specific interests in sponsoring this townhall that seem to go beyond a mere opinion poll of the American people.  For one, she mentioned that they had a particular interest in the high quality video of tables working together on the budget deficit problem.

  1. The Townhall as an Opinion Poll – Deficit obsessives would not have gotten too much validation from the results of the opinion poll.  The assembled group was in general favorable towards more stimulus even if that raised the deficit.   A majority favored more progressive tax policies rather than flat, across-the-board taxes.   There was however some support for increasing the age of eligibility for Social Security.  The enthusiasm for a carbon tax and a financial transactions tax were strong.  However, motivated interpreters of the event could distort these messages or selectively attend to only those portions that fit the deficit cutting mantra that targets social spending rather than tax cuts for the wealthy.  Alarmingly, Alice Rivlin who sits on both the “Debt Reduction Task Force” and the “National Commission on Fiscal Responsibility” (the latter being Obama’s bi-partisan deficit commission), commented on the AmericaSpeaks broadcast disapprovingly that participants had shown most enthusiasm for taxing the rich.   More alarming than Rivlin’s views is the sense of entitlement she seemed to have felt to second-guess and stand in judgement of what were a set of multiple choice questions offered by AmericaSpeaks.  The potential for Rivlin’s preferred “folk economics” to override the poll results within the cloistered commissions is then made more vivid.
  2. The Townhall as Colorful Backdrop – The video footage from the event could be used as a backdrop against which the Commission could continue on its deliberation without reference to the poll results or critical comments like mine and those of others about the content and course of deficit cutting efforts.
  3. The Townhall as Grassroots “Civic” Rubberstamp – Similar to being used as a backdrop, interpreters of the event, like Lukensmeyer, could pour the data and results from the event into a form which adds “vox populi” to the conclusions and gives a populist flair to the decidedly elite Deficit Commission.  Below in testimony to the Commission last week, Lukensmeyer constructs an interesting rhetorical chain that condemns partisanship and Washington business-as-usual while, in the end, reinforcing the sanctity of the task of cutting budget deficits as a prime directive and implying that “the people are ready to cut deficits”.
  4. The Townhall as Sanctification of Deficit Cutting – Re-interpreting the same testimony of Lukensmeyer as in “3” above, in a slightly loonier version, the “people’s” concern about budget deficits could be made a sacred cow which could become a (misinterpreted) touchstone of the Commission.
  5. The Townhall as Sanctifying Bipartisanship — Lukensmeyer in the video below portrays like so many political actors in the last few years the importance of bipartisanship; claiming that the Townhall shows that both sides can work together unlike in Washington.  If however one Party is simply trying to damage the other Party and a majority of Americans, what is the moral basis of bipartisanship?

A posting on Youtube by the White House of public hearings by the President’s Deficit Commission. Lukensmeyer’s testimony starts approximately at 35 minutes in.  An interesting effect of the controversy surrounding the deficit commission, including perhaps the firestorm ignited by Co-chair Simpson’s remarks on film has been the posting of approximately 7 hours of testimony on Youtube.  The activities of the Deficit Commission are potential political dynamite.

The Misuse of Civic and Individual Virtue

In the end, my take on the “Our Budget, Our Economy” Townhall and by extension the work of the budget deficit commissions as evidenced so far is that civic and individual virtue is being called upon to solve the wrong problem at the wrong time.  Some people, rightly, would like to live a more virtuous life and not to rely on debt as much in their own businesses and lives.  However, at this time, to repay debts, we must have an economy that generates income and jobs.

Additionally, Americans and those in other developed nations might plausibly and beneficially sacrifice some of their more fleeting pleasures for forward-looking causes like a more sustainable economy and energy-use system.  The Townhall and anti-deficit campaigners are looking to opportunistically collect these sentiments and impulses and yoke them to a cause that does the economy and the long-run deficit little or no good and risks doing the economy some serious long-term damage.   I hope to establish here at Meta-economics that virtue that is ignorant of science or our best organized knowledge is, in the privileged and powerful, no virtue at all.

The America Speaks Budget Deficit “Townhall” of June 26: Folk Economics In Action Pt. 1

I have already reported here on the current rush to cut public budget deficits in the US as well as elsewhere in the developed world but this effort is not just an economic abstraction or future possibility:  here in the US, the Senate has just voted down extensions of unemployment and other social benefits in part on budget fears.  Three foundations, led by the budget-deficit obsessed Peterson Foundation, hired the non-profit AmericaSpeaks to organize one of its “21st Century Townhalls” on the topic “Our Budget, Our Economy” which was supposed to collect “America’s” views on budget deficits and federal spending.  Besides the Peterson Foundation, the John D. and Catherine T. MacArthur Foundation and the Kellogg Foundation lent their credibility and contributed funds to this event as well.

Having heard about these meetings and concerned that a biased sample or biased views on deficits and deficit spending were being promoted there, I decided to show up to the local meeting for Silicon Valley to be held in the conference room of a large law firm located in East Palo Alto.  My own leanings within folk economics may already be obvious to readers of this and my other blog:  I have already been convinced that deficit spending is a necessary evil not only now during the deepest recession since WWII but also on longer term projects like carbon mitigation and developing oil-independent transport infrastructure, until such time that raising taxes will no longer hurt economic recovery.   However I will attempt here to provide an account that is as descriptive as possible and avoids simply a confirmation of my biases.  Others who have attended and/or analyzed these forums have presented views that reinforce what is largely my own view of budget deficit concern and hysteria (Dean Baker, Digby, Richard Eskow, Dave Dayen at Firedoglake).

Account of the Townhall

Given my prejudices, I went in with the preconception that this was going to be an event where the deck had been stacked in favor of cutting spending and where participants had been culled to attempt to “bias the sample”.  I didn’t pre-register and showed up at the swank offices of this Silicon Valley law firm early on Saturday morning.  I soon learned that “America Speaks” is an operation that attempts to organize massive simultaneous discussion/townhall events connected by a video feed from a central location.  Just from a pure social science point of view these mass events cannot be scientific because they involve a self-selecting subgroup of people, like myself, who are willing to spend 6 hours of their time in a room discussing and opining about an issue.   While I was expecting the “America Speaks” folk to look like Young Republicans they appeared to be a demographically diverse bunch of employees, permanent or temporary of this non-profit that organizes these meetings.

About 150 of us were seated at tables of approximately 10 participants with an American Speaks facilitator at each table, who I am guessing was paid, and a volunteer participant sitting at a laptop who was the table’s secretary.   We were handed a packet of materials which included the budget analysis and the agenda for the day.  A representative of the local sponsor of the event Joint Venture Silicon Valley stood up and told us we looked like a cross section of Silicon Valley which was one of a number of strategic falsehoods uttered at the event.  The crowd was obviously much whiter and older than Silicon Valley by far, with an under representation of Asian and Latino residents.  A large screen with a video projector soon became the focus of the meeting.  In the room, there were also a professional soundman and a professional video crew of two who were capturing the interactions at tables.

This is AmericaSpeaks’ brief summary video of the proceedings at the AmericaSpeaks event.

The focus then turned to a broadcast via the video projector and sound system, apparently over the Internet because the picture and sound were sometimes not well synchronized, from the main location in Philadelphia where the two leaders of the event from America Speaks, founder and CEO, Carolyn Lukensmeyer and a man whose name escapes me, introduced first the funders of the event and the ground rules.  There was then a parade of speakers from both the funders of the event and the government sponsored deficit commissions who in various ways intoned the importance of this event.  There was an interesting and rather jarring comment that Lukensmeyer made that the video crews were recording the event to serve the needs of the events’ funders, which seemed to detract from the ostensible public, quasi-governmental purpose of the event.  We were given radio frequency response pads with which we were to indicate our answers to demographic then opinion questions, the results of which were within seconds registered from the 3500 participants around the country.

While I was expecting pure budget worry/hysteria to be ladled out by the speakers, there were a few deviations from this “line” that I think were worth noting:  Lukensmeyer and David M. Walker, the CEO of the Peterson Foundation were careful to note that the economy was in a deep recession and that raising taxes and cutting spending now MIGHT not be advisable.   This acknowledgement of some form of Keynesian wisdom at least as regards deep recessions was also reflected in a few questions at the beginning about current economic conditions.   In those questions the assembled participants showed themselves at least to be “crisis Keynesians”  with a plurality of 32% “supportive” and 19% “somewhat supportive” of spending on stimulus even if it raised the deficit (11% were “neutral”, 12% “somewhat unsupportive” and 26% “unsupportive”).   A majority of 61% thought the government should do more to strengthen the economy, 14% “about the same”, and 25% “less”.  Those critical of the enterprise may well view these statements and three brief questions as simply a “fig-leaf” for an enterprise that may help cast the US and the world into a deeper recession and/or increase social inequality and poverty.  Others may see that even these well-financed activists for cutting spending acknowledge the truth of weak aggregate demand in the recession.

Reinforcing the fears of those critical of the enterprise were the utterances of the two sitting Republican Senators who offered welcoming messages on the video feed, Judd Gregg and Pete Domenici.  Gregg implied and Domenici stated that budget deficits had CAUSED our current economic situation.  When Domenici spoke what I consider to be a falsehood, I could not contain myself and said “False” and was reminded by the table moderator that “everybody needs to have their turn”.   Democratic Senator Dorgan and Rep. Shaka Fatah did not offer anything remarkable that changed the framing of the discourse laid down by Lukensmeyer and the representatives of the three sponsoring foundations.

The “Values” Section Reinforces a Problematic “Frame”

In an acknowledgement that values play a role in economic decision making, AmericaSpeaks forced participants to choose between three choices, at least two of which were designed in a manner that reinforced a highly problematic “frame” for the issue.  These choices were introduced to us as a prelude to the “tough choices” that we would be engaging in in the second half of the event.  The first seven point scale asked us to choose between “Taking care of the current generation” (“1”) and between “Taking care of future generations” (“7”).  Contained within this choice is the set of assumptions of the deficit hawks that spending now endangers future generations and therefore engaging with it “forced” the participants to accept the framework that current and future generations were competing with each other over a fixed pot of money.  Most economists would not accept the view of the economy contained within this choice, seeing “flows” in the economy as being as important as “stocks” (stores of value), though some of these would be more or less concerned about the effect of government budget deficits.    Derived from this one would expect the economically informed or intuitive folk economists to select choice “4” to deny either side of this false choice and in fact a plurality of 42% of the participants selected this choice, while 22% selected “5” and 15% “6” biasing the distribution of responses towards the ethically validated “caring for future generations” that also is the argument which many deficit hawks claim is the result of cutting social spending.

The second “Values” forced choice was somewhat less controversial in that it asked whether the burden of reducing the deficit should be shared “equally” (choice “1”) or greater burden for reducing the deficit should be placed on the “those that have more ability or capacity” (choice “7”).  Here most elected to remain with the current system of progressive taxation with choice “5” garnering 20%, “6” 24%, and “7” 20%.   The problematic element here is that the Values section was introduced as “What are the core values that should guide our decisions about our country’s fiscal future”, which might include running budget deficits into the future or increasing them.  The second choice, in an ideological manner narrows the choice to “reducing the budget deficit” from “fiscal future,” a much broader category.

The final of three choices also presented in simplified terms what is a more complicated political, ethical and fiscal reality. The final choice was between “1” “The government’s responsibility to take care of the most vulnerable people and “7” “Individual responsibility to take care of one’s self”.  While this choice pretty much reproduces the American political liberal-conservative divide, it ignores the idea of government delivered services for “everybody”.  Additionally it suggests that the network of social responsibilities by individuals that make up “government” are the opposite of “caring for oneself”.   While the latter interpretation may seem tendentious, the political choice between offering universal benefits (Social Security, Medicare, single-payer healthcare) or need-based benefits (welfare, Medicaid) has very serious ramifications for the efficiency, fiscal impact, and political durability of social service programs.  The response to this question was the most muddled though slightly biased towards government care of the neediest (“1” 13%, “2” 18%, “3” 15% “4” 21%, “5” 12%, “6” 13%, and “7” 8%).

Tough Fiscal Choices Combined with Political Choices

Having “biased the sample” in a manner that might have appeared subtle to those who were not already wary of the agenda of the organizers of the event, the bulk of the time was spent in an exercise where the participants were to deliberate among themselves and make individual decisions about 42 options with regard to either cutting spending or raising taxes to closing the presumed budget deficit in 2025 by $1.2 trillion.

Controversially, and others have commented on this already, the accounting framework within which the Deficit Commission is operating, lets the Social Security budget, a program that is projected to run without incurring any deficits  until 2037 unless it is used as a slush fund for to make up for revenue shortfalls (tax cuts) in other categories, flow into the general ledger.  This is the preferred schema of the deficit hawks, who seem to want to “smear” Social Security with as much of the “fault” for budget deficits as possible.  The AmericaSpeaks exercise was structured this way as well, with a simple ledger with “spending” on one side and “revenues” on the other.

The booklet that was issued also had a page within which “Approaches to Changing the Health Care System” were outlined among which was “Single Payer”.  There were no action items on this page and Lukensmeyer skimmed over this to go on to the “forced choice” action items that involved either cuts or no change to spending or increases in revenue via taxation.  We were additionally allowed to submit our own options via the computer and notetaker at each table and apparently enough tables reinserted “single payer” as an option for it to be mentioned by Lukensmeyer in her wrap up speech.  According to most assessments of most analysts that healthcare costs are the underlying driver for long-term deficits; the fact that government supervised universal health care systems with cost controls (single-payer and all-payer), which in other countries have yielded equivalent or better health outcomes with 50-65% of US expenditures, were taken off the table undermines the seriousness of both the AmericaSpeaks and the budget deficit commission proceedings.  While the appearance of “pluralism” apparently was vital to AmericaSpeaks its leaders might be concerned about angering its funders, at least one of which is no fan of expanded government services and regulation.

Within then the deficit-hawk-defined framework with pluralistic trappings, the participants still remained surprisingly resistant to slashing social spending in favor of raising taxes on the wealthy.  The results of the forced choice poll of the 3500 participants regarding health care spending in existing programs were a plurality for “no change” 38% with 27% for cutting healthcare spending by 5%, 16% for cutting spending by 10% and 19% for cutting spending by 15%.   There were for Social Security a wide range of choices and here the deficit hawks won at least one talking point where 52% said that the age for full benefits should be raised to 69 but 85% said that more of the income of high earners should be subject to SS taxes by moving eligibility up to 90% of total earnings, while 23% said there should be no change.  A slight plurality in non-defense spending said it should not be changed (32%), while 51% said defense spending should be lowered by 15% with an additional 34% saying it should be lowered by lesser amounts.

In the area of taxation there were three units:  change of existing taxes, reform of the tax code and new taxes.  Participants had to choose between changing existing taxes and a set of pre-defined reforms of the tax code that would supposedly increase its efficiency.  As none of us at our table were tax lawyers or accountants and the 10 reforms of the tax code could have contained hidden agendas, I elected to choose the existing tax option where I could pick and choose.  In the “Raise Existing Taxes” bracket, the group could choose more than one or “no change”.  44% chose “no change” while 68% (some must have cheated) chose a 5% millionaire’s tax, 48% chose a 20% marginal tax increase in the top two tax brackets and 18% chose a 10% marginal incrase in those brackets.  48% chose raising the taxes on capital gains and dividends for those in the highest tax brackets by 5% and 59% chose to raise the top corporate income tax from 35% to 40%.  On the other hand 20% chose to raise everyone’s taxes by 10% of existing tax rates and 8% chose to raise taxes on everyone’s incomes by 20%.

In “Reduce Deductions and Credits”, 51% elected to limit corporate accelerated depreciation for equipment purchases, 45% elected “no change”.   It is not clear from the results how many elected to “Reform the Tax Code” via the 10 measures suggested though the read out I have states that 50% elected “No change”.

Finally, in “Create New Taxes”  a whopping 64% favored a carbon tax while 61% favored a securities transaction tax.  A 5% V.A.T. (national sales tax) polled 27% while 35% elected “No change”.  Finally in additional options, enough tables suggested reducing defense spending by more than 15%, remove the limit on earnings subject to Social Security payroll tax, reforming the tax code to just a flat tax, and the aforementioned single-payer healthcare system to be announced at the end of the event by Lukensmeyer.

About My Table

Finally, I want to end this account of the Townhall by describing how things worked out at my table.  In general, despite my misgivings about the framework and the attempts to bias the results, I enjoyed interacting with the good people at the table where I would say the median age was probably 55-60.  Most of us were probably left of center, though one of us seemed to be troubled by the willingness of the people at the table to agree to essentially no change in spending with the exception of cutting military spending and to raise taxes mostly on the rich.  Our secretary was wearing a pro-single-payer tee-shirt and she and another member of the table had heard about the event through the liberal-left action group  There were no Tea Party members at our table and even that one person who seemed caught up in the discourse of self-sacrifice and benefit cuts, was seemingly a liberal in her interests.  There was one fellow who had his own public-access TV show and was prone to entering into quasi-rants that were slightly off-topic, though he didn’t succeed in derailing the overall discussion, in part due to the intervention of the table leader.  Most decisions at the table about individual measures were made on a 6 out of 10 vote, despite what appeared to be general commonalities of interest and orientation.  If we had worked harder together on individual issues, we might have come to more of a consensus.

The good feeling of working together with civic-minded people may have been part of the point of this whole townhall, a point that may have, as well, its political uses given the structure of the event and its sponsors.  I will continue my analysis of this and other meta-economic issues raised by “Our Budget, Our Economy” in the next post.

The Case for Meta-Economics Pt. 2: Kwak’s Commentary on Thaler

James Kwak, along with former IMF chief economist Simon Johnson, writes one of the leading blogs on financial reform, Baseline Scenario.   Founded after the financial crisis of 2008, Baseline Scenario is mostly devoted to examining proposals for financial reform and urging legislators, central bankers and government leaders to reduce systemic risk to the banking system by breaking up very large banks that are “too big to fail”.  Kwak and Johnson are highly critical of the current form of proposals in the US Congress and advocated for by the Obama Administration as not going far enough in limiting the power of very large banks, which, because of their size, are able to hold governments and taxpayers hostage if they make bad bets on investments.   Among advocates of rigorous financial reform there is an interesting dispute between those who see bank size as a crucial factor while others are less concerned about the size of banks, a controversy I will take up at another point in time.

Kwak, Berkeley Ph.D. in European history, a software entrepreneur, former McKinsey consultant, and now studying law at Yale, has written a recent post critical of an article by Richard Thaler in the New York Times.  Thaler is one of the two or three leading economists and psychologists associated with behavioral economics and behavioral finance, new fields within economics that attempt through empirical study to examine how people make economic decisions.  Behavioral economics has come to challenge the dominant assumption in neoclassical economics that people are rational “utility-maximizers”.  While rational economic man has not been fully displaced from the structure of economics, behavioral finance is now considered to offer a “respectable” alternative to the assumption of purely self-interested rationality.

While a number of people have drawn the parallel between the Deepwater Horizon blowout and the 2008 financial blowup, Thaler’s Times column suggests that both with BP and the financial collapse we are tapping into a common cognitive problem that people have in assessing low probability risks.  Additionally Thaler feels that complex technology, sometimes beyond the ken of leaders, and diffusion of responsibility via complex inter-corporate partnerships interact with this cognitive difficulty that we have in preparing for unlikely events.  Thaler points out, in an interview in an an accompanying podcast on the Times website, that partners in these multi-company alliances have varying interests which don’t necessarily align with each other or with the common good.  Thaler’s prescription, though not stated clearly and strongly, is for regulators to require higher levels of insurance, where the insurers then would be incentivized to oversee operations.

Though not in principle opposed to the idea that people are bad at assessing risks and that rational economic man shouldn’t be assumed by economists, Kwak in his response takes issue with the way that Thaler’s thesis can be used to whitewash the very specific risks involved with large corporations that have incentives to maximize profits and externalize costs onto the population at large and governments.  Kwak points out that these “cognitive biases” within these companies almost always go the way of minimizing costs and maximizing profits (very much like rational economic man by the way).  Kwak also questions that one can personalize the composite behavior of corporations as he sees Thaler doing.  Kwak sees far more intentional rather than inadvertent minimization of risk in both the culture of large Wall Street financial institutions and BP.  Kwak, an advocate for much more stringent regulation of the financial industry, sees no way out of a return to more stringent external regulation by government.  While Thaler does not come out against regulation, his analysis tends to excuse the specifically corporate blindness to risk in the face of a structure of incentives and a regulatory culture that looks the other way.

Necessarily Creative Interdisciplinary Borrowing

Both Thaler’s and Kwak’s views on the common elements between the BP disaster and the financial crisis require the integration of frameworks and elements from outside of traditional economics.  Thaler’s view draws from cognitive psychology and organizational theory to help explain how our ability to assess economic risk became distorted in situations involving high technological complexity, low-probability events, and split organizational structures and incentives.  Kwak introduces a political discourse (one could say political science though this is not explicit) of power and power differences and a re-valuation of the now conventional economic theory of externalized costs, where externalization is the norm  rather than the exception.

Kwak and Thaler might agree on the individual “nudges” (Thaler co-authored the influential book “Nudge” with Cass Sunstein) or circumscribed regulations but Kwak suggests that overall there is a fundamental lack of government oversight and authority in our current system which were instrumental in both the BP spill and the financial crisis.  Thaler suggests that with a few minor tweaks, the corporations will “regulate themselves” by making sound assessments of risk.  Kwak suggests that there is the need for an entire cultural shift in business backstopped by a strong government regulatory culture.  There is then a fundamental philosophical and analytic difference between the two positions despite what might be some areas of agreement.

While I don’t want to argue out this particular dispute in this context, I am using this as an example, and perhaps not the best example, of smart, thoughtful people (Thaler and Kwak) bringing in a mixture of disciplinary tools in to solve some of the gravest problems of our times.  This “ad-lib” mixture of tools is a sign of personal erudition and analytic flexibility in assessing the reality of a situation but it leaves us not being able to compare their respective positions (not diametrically opposed by the way).  The contest, such as it is, between these two somewhat competing positions, is then consigned to the level of rhetoric:  with which account does  a reader feel more sympathy?  There is a comparison of apples and oranges.

Towards a Meta-economic Framework

My conception of a meta-economic framework could include as “compulsory” a consideration of some of the interdisciplinary elements as well as assumptions which both Thaler and Kwak (as well as others) introduce.  This may make some writing  less “fun” to write and “essayistic”, but it might serve the public better to be able to choose between arguments if assumptions, data, and analyses could be compared side-by-side.   A meta-economic framework would compel writers/”scientists” in this area to consider the vital connections between one disciplinary area and the immediate proximate causes that originate outside that discipline but impinge upon their chosen topic.  Aren’t these issues a matter of life and death, requiring a more serious engagement with reality?

As an example, Thaler might state or declare in some form that “I believe that corporations can accurately assess risk with the right alignment of corporate interests within and among corporations”  and “I believe corporations can share the characteristics of individual people in their ability to assess risk”.   Kwak on the other hand might state, “I believe internal controls will often be insufficient to control speculative excess and the misalignment of incentives within large oligopolistic corporations”.

A joint framework that encompasses both Thaler’s and Kwak’s “narratives” would include cognitive ability to assess risk, ability by economic actors to internalize ethical standards, relative autonomy of corporations vis a vis government, role of corporate internal group dynamics, employee performance metrics, operational complexity, alignment of interests in industry partnership “ecosystems”, and dominant government ethic of and power to regulate the industry in question.   If each author, this is maybe assuming a longer form of exposition perhaps, had touched upon their views of each of these dimensions, then readers would see both the weaknesses and strengths in their “models” for each of these debacles as well as whether they both can be analyzed together meaningfully.

While some may throw up their hands and say:  “we can’t consider every factor!”, I would counter that we clearly are in need of an analytic framework that guides us to either more comprehensive or different points of focus than the frameworks we have inherited prior to either the financial meltdown of 2008 or the BP blowout of 2010.  I am proposing what I am calling a meta-economic framework as a “workspace” to build that framework from the tools of economics and related disciplines.

The Case for Meta-Economics Pt.1: Fiscal Austerity as Prudence…or Madness

The most immediate and obvious case to be made for (something like) a meta-economics, or the equivalent, is the lack of a consensus among respected economists about what to do about the sovereign debt crises in Europe and the push for fiscal austerity that has emerged this year in the US and in many other countries.  We have many politicians as well as economists on the one hand claiming that now is the time to cut budget deficits by cutting spending (mostly on social programs) and on the other hand we have economists and some politicians who are calling this the equivalent of madness, urging steady or higher levels of government spending to stimulate weak economies.

Two Opposed Schools of Thought

The debate can be viewed either from the point of view of individual economists, who show some variability in their opinions, or as a clash of two schools of economic thought with regard to the value and use of fiat (paper) currencies and government spending.  Keynesian economists believe that government (fiscal) deficit spending is necessary in economic downturns to make up for reductions in demand from a troubled private sector.  In the case of our current economic crisis, households and businesses are either loaded down with existing debt and/or cannot get access to credit to buy goods and services.   With a fiat currency (where the government can print money), governments can choose to go into more debt and/or risk inflation of the currency by spending more than they collect in taxes to spur the economy.  The priority for Keynesian economists is to boost employment and spur demand for goods and services by the means available to make up for the slump in private spending.  Keynesian economists point to the relative economic stability of the period 1940 to 1980, as well as the lack of a clear association between government debt and economic prosperity at least in countries that control their own currency, to make the case for deficit spending.

Opponents of deficit spending, deficit “hawks”, many of whom share the assumptions of neoliberal/neoclassical economics, are concerned about how lenders in financial markets will view governments’ apparent disregard for the debts they are running up to stimulate their economies and will impose more stringent credit conditions on lending to these governments.   In general, these proponents of fiscal austerity as a cure to what currently ails us, represent a “hard money” position, in that they fear inflation more than Keynesians, who might even recommend “inflating away” national debts.  Fiscal austerity that cuts government spending and activity has the critical “side benefit” for neoliberals in that it cuts government regulation of industry as well as reduces the role of government as a competitor in the provision of goods and services to the private sector (Social Security competes with investment managers for instance).

A related but subsidiary issue is the type of government deficit spending in a recession based on what Keynes called the multiplier effect.  Some types of spending will circulate more quickly in the economy based on people’s propensity to save or spend.  Spending on wages and social welfare programs will circulate more quickly in the economy producing larger effects, multiplying the economic effects of the initial spending.  The neoclassical school objects to or questions the multiplier effect on the assumption that people will not spend the money assuming that higher taxes are coming to pay off the government debt generated by deficit spending.

For the purposes of this short post, I am going to assume that the dispute is fiscal austerity or no, but a reasonable case can be made that the fundamental dispute between these two groups is about the type of government spending rather than the amount of that spending.  As we shall see below those in the fiscal austerity camp differentially favor cutting social spending rather than defense spending or other programs favored by the political right-wing.

Individual Economists

Paul Krugman,  Brad DeLong, Dean Baker and others who occupy more of a Keynesian position on fiscal spending, are most scathing in their indictments of the calls for fiscal austerity that can be heard now around the world.  Krugman points out, as does Dean Baker and others that measures of what lenders think of the creditworthiness of the US government indicate that there is no current concern about the US’s fiscal health (low CDS spreads).  Krugman and other in the Keynesian camp, like Brad DeLong, point out how deficit hawks tend to blur the distinction between countries that control their own currency (the US, Great Britain, etc.) and the countries of the Euro-zone who are constrained by Euro-wide currency policy.   There are differences in the degree to which Keynesians pay attention to the question of budget deficits:  some think that raising deficits is a temporary fix while others are relatively indifferent to the amount of the deficit.

On the other side of the fiscal austerity debate are also many respected economists, some of whom did predict the financial crisis of 2008.  Ragu Rajan reads a number of macroeconomic signals, including increased employment in Brazil, as indicating that the Fed might think about raising interest rates, which is an anti-inflationary measure and a sign of pulling back on monetary stimulus of the economy.   Krugman lambastes Rajan and others as submitting to a climate in which pain infliction on the economy and especially the poor is considered to be a way to “reassure markets”.  Jeffrey Sachs, also a highly respected economist is caught by Brad DeLong assuming that Obama’s stimulus spending raised interest rates that private lenders charged the government when it didn’t.   Both Krugman and DeLong feel their opponents are ignoring data on the ground and imposing upon and reading into reality their prescriptive model for how the economy should have, is and will behave.

Economic Advocacy Organizations

Driving the debate within and outside the academy are the work of advocacy organizations that, apparently, believe that social spending should be cut instead of targeting military or other budgetary items.  The billionaire and former Secretary of Commerce under Richard Nixon, Pete Peterson has had a major influence in inspiring the Obama Administration’s deficit commission through his funding of numerous foundations, economists and advocacy organizations.  Peterson, through his great wealth and political influence has been able to create a climate of economic opinion within which he has insistently attempts to create concern about government budget deficits while favoring only one of many possible solutions.  As can be seen in this 2003 interview with Bill Moyers, Peterson decries tax cuts and other signs of profligacy by both parties yet almost uniformly prescribes cutting social spending over either cuts in other discretionary programs or tax hikes on people like himself.  Peterson’s perspective is also premised on a theory of political behavior by policymakers who he assumes will never raise tax rates to deal with what he bemoans as a great evil, the imposition of debt upon future generations.  The assumption of this type of political behavior by Peterson does agree with the anti-tax prejudice of Peterson’s political milieu.

Making Sense of the Conflict

In broad terms the conflict in systemic terms is between two economic theories with opposing interpretations of that subsection of the data that they both address and also in this case some variance with regard to how much or which parts of the data are accounted for by the “story” that each side tells.  Furthermore, even if there is or would be some partial agreement on interpretations, the solutions offered are at odds (which part of the deficit to reduce or cut and when).   On the one side we have people who see government spending as a tool that now because of slumping economic conditions must be deployed, despite the negative impact on budget deficits.  On the other side we have people who place a higher negative value on budget deficits and the risk of inflation relative to the potential positive impact of spending on employment and current demand for goods and services.  For the latter group, the tradeoff is so, seemingly, frightening (or they wish to inspire fear in others) that they appear to imagine or invoke the prospect of events for which there is currently little or no data.  Alternatively they may be seeking to inspire “retribution” by private markets on the debts of governments, prospectively, by painting a negative picture of how these governments manage their budgets.

To me, as may be apparent from the way I am presenting the data, the case is better argued from the Keynesian side.  In this case, DeLong and Krugman seem to be presenting more apposite and solid data but the counterfactual “worries” of Sachs and Rajan are not to be entirely dismissed given their positions of authority and the reflexivity of financial markets, where opinion can become reality through the action of powerful and/or motivated stakeholders.  It is not unknown that powerful financial market actors can create chaos because of antipathy towards a government or because they simply want to achieve a higher return.  Claims of fiscal imprudence by authoritative voices can be invitations to markets for attacks on the currency.

While the point of recounting this debate may elude people who are not economic policy “wonks”, the stakes in what passes for an intellectual debate here could not be more immense:  if the austerity group prevails we may see, as in 1937, a very deep second dip to this recession, though these advocates would deny that this would be the outcome.  If the apparent wishes of economic advocates like Pete Peterson are achieved, we will see an undoing of the social and economic stabilizers created by the New Deal and Great Society in the period from the 1930’s to the 1960’s.  Furthermore, and more assuredly, choosing fiscal austerity, especially those who wish to cut social and other domestic spending rather than military spending and not raise any taxes, will bring much of the movement towards a green and oil-independent economy to a halt.  While some politicians and voters may be able to salvage some portion of existing social programs, the “new arrivals” in the areas of climate and energy that may require some deficit spending to be jumpstarted will almost certainly fall by the wayside.

Class Interests and Government Spending

While I am treating this here as a problem of systemic theories of the economy, many imply or state that this is a class conflict between economic groups.  The accusation leveled at Pete Peterson by his opponents can be parsimoniously stated as that he is waging “class war from above” by differentially targeting those social programs that stand in the way of financial capital in maximizing its profits.   Even more insidiously, the effort to stir hysteria about fiscal spending can be seen as effort to create a “balance of terror” by actors from the financial sector to guard its huge profits and downplay its culpability in the 2008 financial crash (“we weren’t the imprudent ones, you were”).  On the other side, deficit spending and social spending combined with progressive taxation redistributes income downward, leading the “haves” to feel that they are supporting the “have-lesses” and the “have nots”.   The implication by the “haves” is that they represent economic virtue while the “have-lesses” and “have nots” have not been prudent and are asking for a hand-out.

Alternatively, if we accept that there are economic classes with different and conflicting interests, the conflict is over a renegotiation of the social contract between those classes.  The post-New Deal, post-WWII consensus was that the “haves” owed a portion of their income to the society at large and to the less fortunate.  The idea was that everybody has an obligation to society and that individual success contains an element of luck.  The Reagan-Thatcher neoliberal criticism of the post-War consensus was that each person earned according to what he or she is due and that the society-at-large did not represent an economically important entity.  Redistribution of income via governmental spending and progressive taxation was and is opposed by neoliberals because it violates this principle and does not reward economic success.  This schematic view overlooks complexities of either position.

If this is a matter of economic class conflict two basic solutions are possible:  either one allies oneself with one or the other class or one attempts to stand apart and negotiate some compromise between those class interests.

Resolving the Conflict:  Three Strategies

I can see at the moment three basic strategies for economists and policymakers in dealing with this critical challenge and the yawning gap between the two positions as regards immediate action.

Strategy 1:  Make Better Arguments for Each Position

Advocates for one position or the other have good reasons, if they believe that what they represent is true, right and good, to make better arguments for each position.  I have a strong bias in favor of the Keynesian position at this point in time because of my concerns both about our overall economic health in the short and medium term as well as long-term environmental sustainability:  I see, at the least in the US, no significant moves to reduce oil dependency and address climate change without some deficit spending.  I am also persuaded by the relevance of the data presented by Keynesians to the questions being asked by both sides, in particular the phantom nature of market “concerns” about the security of lending to the US government at this point in time.  By both sides making clearer arguments, we may see clarification of the issue.  One danger without a strong meta-economic framework is that one side or the other would make arguments that are emotionally persuasive in nature but not well-reasoned and/or would use its considerable financial means to broadcast the less well-grounded argument in emotionally compelling but fallacious terms over the airwaves.

Strategy 2:  Political Compromise Between the Two Positions

While a bipartisan deficit commission and similar bodies may need to engage in compromise to reach consensus, this strategy may only serve to confuse the scientific and intellectual issues involved.  Some items from one “side” will be adopted and some proposals from the other “side” will be adopted in a melange of proposals.  While one sides’ arguments may be popular with politicians but wrong they will appear to be given equal or greater weight to  positions that are well grounded in reality.   If on the other hand there is an implicit recognition that there is no systemic economic theory that works but simply a class compromise between two interest groups, then adopting a political compromise which reflects the balance of power or the outcome of the discussion is the only possible outcome.  Either the compromise between systemic views or the compromise between classes would postpone clarity on the issue, though might prevent a disastrous outcome.

Strategy 3:  Develop a meta-economic framework for evaluating claims of both positions

The final strategy requires more time and preparation but I believe it will ultimately lead to better results: create a meta-economic framework for evaluating as much of the relevant data and positions involved as possible.  Such a framework would be able to weigh the benefits of economic stimulus, perceptions of government debt by private financial markets, other risks associated with debt, inflation costs and benefits, group/class interests and overall social welfare projections that are associated with an number of different scenarios.  I am calling this a “meta-economic” because it would straddle both the Keynesian and the neo-liberal or “hard money” position but create a new and better scientific framework rather than a melange of both positions as would “Strategy 2”.  New factors may be introduced from within economics or from a related discipline like political science, psychology, the natural sciences, etc to create new perspectives on hardened positions rather than to mix perspectives up as part of a political compromise.

None of these three strategies is mutually exclusive.  In upcoming posts here, I will look into this issue as well as other questions that would lead one to build a meta-economics.