The General Theory and the Special Theories

by John Q on July 9, 2020

The title of my book-in-progress, The Economic Consequences of the Pandemic is obviously meant as an allusion to Keynes’ The Economic Consequences of the Peace, and one of the central messages will be the need to resist austerity policies of the kind Keynes criticised in his major work, The General Theory of Employment Interest and Money. That title, in turn was an allusion to Einstein*, and the Special and General theories of Relativity.

The special theory Keynes wanted to replace was that of classical economics, in which the economy always tends to full employment unless governments or unions get in the way. The implication of classical economics, articulated in the Great Depression by Mellon (“liquidate the rottenness”) and in the Lesser Depression by the advocates of “expansionary austerity” is that the correct government response to a recession is to cut taxes, cut spending even more so as to balance the budget, and let the private sector expand as it naturally will.

The disastrous failure of austerity, particularly in Europe, has put its advocates on the defensive. Nevertheless, the idea that deficits are always bad has plenty of intuitive appeal (think of Angela Merkel’s Swabian housewife carefully balancing the household books). Austerity has an even stronger hold on those in the policy elite whose thinking was formed in the “inter-crisis” period between the breakdown of the Bretton Woods system in the early 1970s and the Global Financial Crisis of 2008. That accounts for just about everyone in the political class aged over 40, with the exception of a handful of people who have stuck to positions taken in the 1960s or just afterwards, such as Jeremy Corbyn and Bernie Sanders** .

Public expenditure has expanded everywhere in response to the pandemic, and the need for more spending is going continue long after the pandemic is controlled, either by continued restrictions or the development of a vaccine. The fight against austerity will begin with the expiry of time-limited emergency measures, which will happen in the second half of this year (September in Australia and much sooner in the US).

But if we can fight off the push for austerity, there’s another special theory that needs to be dealt with. Modern Monetary Theory (MMT) is, in essence, based on the assumption that the economy is always in what Keynes called a “liquidity trap”. This is a situation where the economy is so depressed that cutting interest rates to zero has no effect on demand – people pile up money rather than spending it. The only solution is for the government to spend money creating jobs (expansionary fiscal policy). And, as long as the liquidity trap continues, governments can keep increasing spending, financed either by money creation or zero-interest bonds.

The problem with this special theory is that a successful application implies destroying the conditions under which it works. Once the economy reaches full employment, any increase in public expenditure requires a corresponding reduction in private expenditure. The only sustainable way of achieving this is through taxation, and the only just way of doing it is through progressive taxation, with those in the top decile of the income distribution giving up a bit more consumption, and those in the top 1 per cent giving up a lot more. MMT advocates, like Stephanie Kelton kind-of admit this, but continuously seek to dodge the point. Here for example MMT advocates Nersiyan and Wray suggest that the Green New Deal can be financed without “taxing the rich” (a problematic term for progressive income taxation, since so few people admit to being rich) relying instead on “well-targeted taxes, wage and price controls, rationing, and voluntary saving”. “Well-targeted taxes” turns out to be a euphemism for a payroll tax surcharge, the most regressive form of broad-based tax.

Nersiyan and Wray draw on Keynes’ proposals in “How to Pay for the War”, which do include measures such as rationing and deferred pay, as well as large trade deficits. But the central point underlying Keynes analysis was that the war could not last forever. One way or another, the struggle with Hitler would be decided. In these circumstances, and with the total mobilisation needed for a life-or-death struggle, measures like deferred pay and rationing represent a way of sharing a necessary sacrifice. These were additional to, not a substitute for, steep increases in income and consumption taxes

A permanent change, like the original New Deal or a Green New Deal can’t be sustained with temporary wartime expedients or expansionary fiscal policy. What is needed is a transfer of resources from private consumption and privately directed investment to public use. That can be achieved through various forms of predistribution, reducing the incomes of those receiving an excessive reward at present, or through taxation. While both need to be pursued, it’s unlikely that predistribution can do all the work.

Keynes got this right in 1937, when he said “the boom not the slump is the time for austerity at the Treasury”.

*This just struck me, but of course I’m not the first to notice. Here’s James K Galbraith, attributing it to Robert Skidelsky. Still, good company to be in and Galbraith says not many others have made this point. And, it has been pointed out on Twitter, Pigou made much the same point in his critical 1936 review.

** If I had ever achieved any political influence, I would also fall into the category



Tim Worstall 07.09.20 at 10:42 am

I know this is what many say but it’s not actually what it was:

“the advocates of “expansionary austerity” is that the correct government response to a recession is to cut taxes, cut spending even more so as to balance the budget, and let the private sector expand as it naturally will.”

Expansionary austerity depended upon the idea that it is possible to be fiscally contractionary but also overall expansionary if monetary policy is more expansionary – perhaps much more – than fiscal policy is contractionary. This may or may not be the policy mix that certain people would like but it can actually work.

The evidence being that this is what Britain did do in the early 1930s – come off the gold standard while raising taxes and cutting spending – and it did work. The Depression was very much shorter in the UK than in the US as one example. This is also where the phrase “No one told us we could do that” was used, as an outgoing Labour minister said when the incoming Tory (or was it National?) government came off that gold standard and the pound devalued by 25%.

Again, this might not be the policy mix that you or they or whatever would like but it’s not as obviously counterproductive as the description you’re using. And yes, there was a deliberate attempt to devalue the £ in 2010 and following.

The British politico-economic debate at the time did actually make this point even as it then got drowned out in the larger shouts about “austerity”. QE clearly being very expansionary monetary policy….

Here there’s a bit of an interesting question:

“Once the economy reaches full employment, any increase in public expenditure requires a corresponding reduction in private expenditure. The only sustainable way of achieving this is through taxation, and the only just way of doing it is through progressive taxation, with those in the top decile of the income distribution giving up a bit more consumption, and those in the top 1 per cent giving up a lot more.”

The usual analysis is that if that private consumption doesn’t get reduced by that taxation then inflation will result. Or, the MMT manner of saying the same thing, the government created money must be extracted from the economy and destroyed. OK.

But as we know the richer consume less of their incomes than the poorer. They save that is. Therefore taxation of those richer to reduce that inflation – or reduce private consumption – will have to be higher if it is aimed at the rich than if aimed at the poor. We get back to an example of the efficiency/equity trade off.

If we wish to reduce inflation efficiently then we need to be taxing those poor. If in an equitable manner then the rich of course. There shouldn’t be any surprise at this either, it’s merely the inverse of the commonplace observation that distributing stimulus to the poor has more bang for the buck than to the rich precisely because of that same marginal propensity to save/consume.


Alan Luchetti 07.09.20 at 10:53 am

“Direct taxes on high incomes and wealth can reduce inequality at the top and could reduce spending. To obtain either of these advantages will require high tax rates on both wealth and income—perhaps even higher than what Representative Alexandria Ocasio-Cortez has advocated (a top marginal tax rate of 70 percent). If resource use by the rich can be reduced, that will free up resources to be used in GND projects. Instead of building a third or fourth mansion for the rich, public housing for the poor could be provided. Instead of producing (and fueling) private jets, efficient forms of mass transit could be built and operated.”

Nersiyan & Wray, – page 33)


Hidari 07.09.20 at 1:35 pm

I asked this in the relevant thread and never got an answer: isn’t the key point about MMT, and the key difference between MMT and Keynesianism, that whereas Keynes said:

“the boom not the slump is the time for austerity at the Treasury”
….proponents of MMT say that there is never any time for austerity and that you don’t have to balance the books, ever? That’s my understanding. Could be wrong. But it’s definitely quite a big difference (assuming that I’ve got it right).

Also, about full employment. There’s full employment and there’s full employment isn’t there? In recent years (i.e. before Covid) and also in the 1990s, we had ‘full employment’.

But it wasn’t really full employment, was it?

This is quoted from a Dsquared thread on Twitter, who was quoting someone else. But, anyways….

The guy was quoting from a a bloke on Twitter, asking his Dad about ‘full employment’. His Dad came back, saying that as far as he was aware there hadn’t been a ‘tight labour market’ since the 1970s. And he quoted from his experience of a firm (I think it was a computing company, but it’s really not important) in 1972 or similar, where the boss offered his staff a 6% pay rise (i.e. for that year). The staff were so affronted by this offer that they all, en masse, quit. And of course all of them had much better paid jobs within 2 weeks.

That’s full employment: where staff/workers lose their fear of the boss, and when the boss tries any of his shit, they have no fear of saying STFU and quitting. And it’s pretty obviously why bosses, therefore, don’t really want full employment (as Kalecki pointed out).

So, even if it were true that when we reach full employment we need to raise taxes, that point may be a very long way away.

It really depends on what you mean by ‘full employment’.


Brett 07.09.20 at 3:21 pm

“Well-targeted taxes” turns out to be a euphemism for a payroll tax surcharge, the most regressive form of broad-based tax.

I was thinking about that. Under MMT, the ideal tax is something that can be enacted across the economy quickly and be adjusted on relatively short notice to deal with potential inflationary surges. That would mean some combination of payroll tax, sales tax, and investment tax.

But I agree that the advocates really don’t like talking about that – they know the appeal of MMT is that it encourages more public spending, and not that it requires higher taxes.


bob mcmanus 07.09.20 at 4:45 pm

The Galbraith was wonderful, and before the time I started reading him. Thank you.

I have often via literature approached Keynes and the GT as a part of modernism (Postmodern? I would read the arguments). More specifically, the rationalist world-building of the SF Utopian/Dystopian sub-genre. Morris, Bellamy, Wells, Stapledon. And nothing at all wrong with that, from the liberal modernist late capitalist scientific perspective. “If we follow these universal and generalist rules formulas institutions, with exceptions, and adjusted for local conditions, peace and prosperity with efficiency and justice will result. Or as close to Utopia as we can get.”

Leftists, or some of us, don’t have a plan or goals or rules for after the Revolution (or during the bourgeois reformist stage, liberals can handle that and we’ll vote with them) cause we don’t wanna tell our socialist grandchildren what to do or think they would listen anyway.

At first glance, for just a moment, I was confused and thought the title allusion was to “Economic Possibilities for Our Grandchildren” There is plenty of evidence for Keynes as modernist including the early work on probability and even the Treatise on Money.

Einstein as modernist would imply that his work was another useful mythology and would level up the objections and arguments.

(And not dead yet. Anyday now, promise.)


Lee A. Arnold 07.09.20 at 4:52 pm

As if on cue, today Biden released a $700 billion plan to buy US goods, promote US research, and fix US supply chains for the next crises, directly challenging Trump’s populist message, which Trump scarcely acted upon before he turned his Administration into a chop shop for plutocrats and lobbyists.

This may cause Trump to put more pressure on Senate Republicans to “do something”, making some more COVID-19 relief checks more likely, as well asincreasing tincrease the mutual exasperation between themselves and Trump.


Lee A. Arnold 07.09.20 at 5:09 pm

Make that: It will increase the exasperation & mutual loathing between White House and Senate, because Trump wants them to save his election, and the Senate Republicans don’t want to help any poor people. Just switched from a desktop to a laptop and I’m all thumbs on the trackpad.


mary s 07.09.20 at 6:12 pm

I’m not an economist. I’m always confused by the notion that there’s a “natural” state of growth, or a “free” market. Maybe it’s a useful fiction? But it seems pretty obvious to me that the government is always involved, in any number of ways — not just via taxation — and that the argument is about how the government should be involved and to what end(s).

Also, I don’t know what the “policy elite” are thinking, but this particular crisis is not the same as the Great Recession and other downturns, since the idea early on was to keep people from spending money on a lot of things that would involve going out in public. And even though many US states have “reopened,” many people are still (rightly) nervous about doing that.


nastywoman 07.09.20 at 8:38 pm

(think of Angela Merkel’s Swabian housewife carefully balancing the household books).

But she isn’t doing this anymore A.V. – Right?
Now Bloomberg writes:
”Merkel Is Seizing Her Chance to Revolutionize Germany’s Economy
The pandemic has revived a radical plan to transform the country into a state capitalist with echoes of France and China”
It had already been rejected as too radical for the political and business establishment when first proposed last year. But with the crisis as a catalyst, the package passed cabinet the following Monday and was law by the end of the week. It puts Merkel in charge of the most dramatic re-engineering of the German economy since post-war reconstruction.

By the time she’s finished, the chancellor will have installed a kind of state capitalism in Germany that borrows heavily from France and is even informed by China’s success. It will give officials in Berlin new powers to intervene in the economy: they’ll be picking winners and losers, seeding new industries and grooming national champions. Buying stakes in companies is no longer taboo, and the touchstone balanced-budget policy has been jettisoned to unleash the full power of the German balance sheet.

AND the Financial Times writes:
”Will Angela Merkel save Europe”?

Better talk to her before writing this book – as isn’t this Keynes Dude already…
(since a long time?)


MisterMr 07.09.20 at 8:38 pm

@John Quiggin

Can you give an operational definition of “full employment” without referring to inflation?

If you can’t, then “inflation will not go up until it goes up” tells nothing about the real world.

The keynesian theory of full employment implies that there is a state, where wages are equal to the marginal productivity of labor, that we call full employment, and that the economy tends to that state so if the government goes on spending at that point it just causes inflation, hence inflation is used as a proxy for full employment.


1) marginal productivity of labor cannot be measured as distinct from productivity of capital if we are not at full employment, so we do not really know if or what full employment is;

2) even if the theory is correct it can’t rule out that at this “full employment” a lot of people are still unemployed, maybe we need to stay consistently above full employment;

3) MMT idea that the economy doesn’t tend to full employment is therefore a big break with standard keynesianism, it implies that they are using a different definition of “full employment”.


bob mcmanus 07.09.20 at 9:41 pm

1) I don’t really get MMT, so I will leave that to others. My instincts of course run toward confiscatory taxation.
2) As far as inflation goes, I am ok with 5-9% having lived through the 70s.
3) There is a limit of course based on resources available which is considered THE problem with Keynesianism. and I do remember Joan Robinson, Sraffa and the work on wage-price regimes in the 70s. Kalecki is good on the relationships between capital and labour shares.
4) There has been work on an understanding of hysteresis that cuts both ways. Just as prolonged unemployment can lower industrial capacity, a regime of high inflation, employment over full for a prolonged period, and massive if not ridiculous deficit spending on infrastructure such that expectations of business and consumers are permanently shifted upwards can increase capacity and manage unemployment/inflation. So I am not interested in handing consumers cash, without pricing power this is regressive. I want all the gov’t/people public common goods we can buy with printed money until they stop us with double-digit interest rates. And not the Fed rate who would obviously under current configuration try to get in the way.

We have over a decade what, pumped 10-15 trillion into the financial sector without any inflation? Let’s try to raise that spending a full factor on infrastructure and safety net. Yes, 150 trillion.

5) Since 2007 I have been saying “Print money til they make us stop.” I believe Keynes meant what he said with the “euthanesia of the rentier class” and that the goal of the left should be the destruction of Capital (not capitalists thru taxation). So a Keynesian economy would tax away, substitute for as commons, or regulate as a matter of law any returns on investment over Keynes 2%.

“But as we know the richer consume less of their incomes than the poorer. etc”

I am probably mistaken, but if I remember my Kalecki, capitalist consumption does include new entrepreneurial investment, which can be as low as Keynes says in the last chapter, but will mark the limit on wage share. This was the theoretical problem of the 70s and why gov’t investment is necessary to increase capacity.

Yes, you get “bridges to nowhere” So what.


Andres 07.09.20 at 9:52 pm

Hi John. Just a couple of bones to pick:

First, Keynes was either misled or misleading in attributing macroeconomic self-correcting tendencies to all classical economists. Adam Smith, John Stuart Mill, and Malthus and Marx were all aware of the possibility of deep financial crises (The South Sea Bubble was already 50 years in the past when Wealth of Nations was published), and of the possibility that financial crises might lead to business slumps; they wrote about it but did not make it the center of their focus because nothing as bad as the Great Depression took place in the 18th and 19th centuries. Brad DeLong also points out that J.B. Say had to partially recant Say’s Law later in his life:

Of the famous classical economists, only Ricardo seems to have wholeheartedly believed in macroeconomic self-correction, and this was likely only because his entire career spanned a period of time when there was plenty of poverty in England, but little underemployment if only thanks to the Napoleonic wars plus emigration to the Western hemisphere and Pacific.

Probably a more useful distinction is Marx’s dichotomy between “scientific bourgeois economists” like Smith, Ricardo, and Mill, and the “vulgar” bourgeois economist propagandists who did end up adopting macroeconomic self-correction as a mantra.

Second, Keynes famous assertion that “the boom not the slump is the time for austerity at the Treasury” is potentially misleading. Depending on the state of business confidence, consumer spending, and the trade balance, it is more accurate to say that the boom not the slump is the time for improving the fiscal balance, which is not necessarily the same thing as either austerity or budget surpluses.

I agree that the one of the big flaws in MMT is the lack of attention paid to the distributional effects of fiscal policy: you can’t rein in inflationary pressure by raising taxes on the very wealthy, as this will only result in reduced saving rather than reduced spending; less progressive taxes may do the trick but will worsen the existing distribution and thus worsen the political situation; the same goes for raising taxes to finance Green New Deal programs.

However, I don’t think that the MMT position boils down to the U.S. being in a permanent liquidity trap situation. The idea of a liquidity trap no longer makes sense once you view the money supply as endogenous, with fluctuations being influenced by fiscal spending (increase) and taxes (decrease). Or to put it in Macro 201 gibberish terms, with an endogenous money supply whose chief influence is the fiscal balance, the IS and LM curves are no longer independent: a shift out in IS curve leads to a shift out in the LM curve, with little effect on interest rates unless the central bank is actively trying to raise them.

Provided they are careful with the distributional effects of tax policy, MMT policy prescriptions may actually work well quite well in terms of economic theory for the U.S., which has both a sovereign and borrower-of-last-resort currency and consequently also has a large import cushion to absorb inflationary pressure. The real problem is political: neither Wall Street nor other important sectors of the U.S. industry (oil/gas and Silicon Valley, among others) are fond of full employment if it caused by an expansionary government, and will pull their campaign financing towards the pro-austerity party at minimum and possibly even threaten to limit investment inside the U.S. Kalecki’s Political Aspects of Full Employment rears its ugly head yet again.

And in most countries other than the U.S., the assumptions of MMT don’t fully apply: either there’s no sovereign currency, or governments are forced to borrow in foreign currencies and become subject to foreign currency reserve constraints, plus there’s no anti-inflation cushion provided by extra imports from having the borrower-of-last-resort currency and the resulting capital inflows.

Lastly, Keynes did not go all-out to advocate rationing during the war, favoring consumption taxes instead. It was Kalecki who provided the theoretical justification for rationing by arguing that consumption taxes would also reduce voluntary saving and likely leave total saving unaffected. Rationing in effect works like a type of progressive tax. But short of wartime expedients, it is unlikely that taxation under full employment can be so effective as to by itself eliminate inflationary pressure: either it has to be weighted towards the lower income brackets with unpleasant political consequences as John points out, or it has to be accompanied by an upward push on interest rates, which invalidates the MMT argument against crowding out.

Overall, MMT founders not because it is an inaccurate picture of the Keynesian system and its Lerner/Knapp satellites, but because Keynes’s theory was itself incomplete (not general enough?): it does not incorporate distributional, political economy, and international finance dynamics needed to have a fully complete theory of macroeconomics.


oldster 07.09.20 at 10:47 pm

There’s really no reason to suppose that Keynes’ title imitated Einstein’s. The habit of distinguishing “a general theory of X” from “a special theory of X” significantly predates Einstein, and works entitled “A General Theory of X” were not uncommon.

The scholastics, following what they took to be hints in Aristotle, distinguished general metaphysics (the study of all beings in so far as they share in being) from special metaphysics (the study of the Being par excellence, sc. theology). Leibniz and Kant still employ this distinction, even when rejecting it, and it is probably through his school-handbook histories of philosophy — steeped in Kant — that Einstein will have first heard this distinction of general theory from special theory.

By the time Keynes published in ’36, he could have already been familiar with Post’s “General Theory of Elementary Propositions” (1921) and Morris’s “General Theory of Values,” (1934), and perhaps even Miller’s “General Theory of Physics” from 1781, just to pick a few pre-1936 titles from a library catalogue.

Of course, it also cannot be ruled out that Keynes was influenced by Einstein’s phrases. Certainly Einstein enjoyed great cachet at the time. But without further evidence, there’s no particular reason to think that Keynes was relying on, or even echoing, Einstein in his title.


John Quiggin 07.09.20 at 11:58 pm

@1 Post-GFC austerity didn’t raise taxes and cut spending, it cut taxes and cut spending even more, as I said.

@2 Immediately after this passage, Nersiyan and Wray decide that taxing the rich is too hard.

@10 In a society with a central labour exchange you can measure full employment directly – if there is an appropriate vacancy for every unemployed person you have full employment. That was how we looked at things back in the 1960s (the Phillips curve/NAIRU ideas hadn’t yet percolated into general discussion)

@12 Some very useful points, thanks

@13 As I mentioned, Pigou (Keynes’ most prominent critic*) made the point in his review, so if it was a misunderstanding or misrepresentation, Keynes could have said so.

As regards the titles you list, I’m having a hard time imagining what a special theory of elementary propositions or 18th century physics would be. Aren’t these titles just a claim to cover the whole field rather than selected topics?

  • The idea that Hayek was an important critic is a recent invention.

Alan White 07.10.20 at 2:44 am

Pace oldster, I think there is very good reason to believe that Keynes was reflecting Einstein’s theories. Until Einstein published his “popularization” entitled in translation as “The Special and General Theories” in 1916–when his general theory was still freshly published as his first book–his two theories were not so distinguished in scientific or popular terms (I’m using Pais’ authoritative work as the basis for stating this, but frankly have no specific citations beyond the fact that it appears Einstein instigated this distinction). I remind folks also that his terms in german reflect his ideas that relativity can be used in special–restricted conceptually to short and flat instances of spacetime–and general–less restricted in terms of large-scale spacetime–and so insinuate distinct realms of explanation. But in any case the terms after 1916 obviously took off in referring to his 1905 and 1915 works both in scientific and popular realms of discourse, and like his image and reputation were simply everywhere in any discourse about him. The likelihood, given his rock-star status for decades thereafter, is that Keynes was in fact tipping his hat to someone who placed these two terms in not just professional but popular domains. Now whether the restricted versus generalized contexts makes sense with respect to Keynes’ work, I’m far too incompetent to judge.


nastywoman 07.10.20 at 3:12 am

AND? –
because the German economy – (like in 2008/9) will ”weather” this crisis ”the best” –
there might be another wisdom of the Swabian Housewife to be considered –
(as I was born in Stuttgart and went to the Waldorf Kindergarten in Stuttgart)
And there I learned:

”Spare in der Zeit – dann hast du in der Not” –
which means that in a HUUUGE crisis you never can be caught – as Warren Buffet said:
”Swimming Naked” –
as there is this other general German saying:
”Mit vollen Hosen ist gut stinken” –
and so – at least in Europe – the country which had save the most -(In good times)
has no the most money to spend –
(in bad times) –
even without doing all the ”MMT stuff”?


nastywoman 07.10.20 at 3:38 am

”Spare in der Zeit dann hast du in der Not”

and I didn’t write that – because I’m some stupid Hayek Fan – or ”Crazy Anglo-Saxon Capitalism” – I wrote that because it was just reported that 14 Million Children in my homeland the US are going hungry.

And that is ”NOT ACCEPTABLE” -(to say it still ”politely) – and a really – REALLY terrible economic consequence of the Pandemic – which could have been avoided if B.V. my homeland would have had the ”social net” any civilised European Country had -(and has)
And perhaps the Book about ”the economic consequences of the Pandemic” could start with ”facts” – like this – as starting with theories of dead economists or money theories – (even if they have something to do with ”the hungry children”) – might be a bit… too ”theoretical” in such times of very…
very… ”practical suffering”?


nastywoman 07.10.20 at 1:30 pm

AND a few… ”things” to consider – as now even writers of the NYT have realised:
it’s a NEW WORLD (economy)

”2022 –
It will not be the old normal. It will be a new world, with a reshaped economy…
And American politics… has entered a new era.
The pandemic increasingly looks like one of the defining events of our time.

The financial crisis of 2007-9 didn’t cause Americans to sour on stocks, and it didn’t lead to an overhaul of Wall Street. The election of the first Black president didn’t usher in an era of racial conciliation. The 9/11 attacks didn’t make Americans unwilling to fly. The Vietnam War didn’t bring an end to extended foreign wars without a clear mission.

Yet if the pandemic really does shape life for the next year, it will probably be remembered as a more significant historical event than those precedents. It could easily be the most important global experience since World War II and the Great Depression.

Past crises have transformed the economy, but almost always because of government policy.

The Civil War allowed Abraham Lincoln and his allies to create a transcontinental railroad and a national network of public universities. The Great Depression led to a raft of federal laws that reduced inequality. The housing crisis that began in 2007 helped elect a Democratic president and Congress that extended health insurance to millions of people.

One of the key post-virus implications could be further consolidation in many industries, with big companies becoming even bigger. Early signs indicate they are surviving the lockdown better than smaller rivals, in part because they have more cash on hand, better access to loans and an easier time switching to online sales.

Consolidation, in turn, tends to increase income and wealth inequality, in part because the largest companies are run by highly paid executives, typically based in major metro areas, and the companies’ stock is disproportionately owned by the affluent.
“My basic fear,” Heather Boushey, a leading progressive economist, said, “is that it leads to a rule by the oligarchs.”

“Even Republicans — younger Republicans — have recognized that the center of gravity if shifting on the relationship between the state and the market.” The virus, he added, “will only accelerate that.”

That agenda is shaping up to have two defining features. The first is reducing inequality — through higher taxes on the rich, greater scrutiny of big companies, new efforts to reduce racial injustice and more investments and programs for the middle class and poor, including health care, education and paid leave. The second is acting on climate change, which could cause even more global misery than the coronavirus. “Climate change cannot be solved by the private sector,” Senator Chuck Schumer, the Democrats’ minority leader, told me. “People under 45 realize it.”

Mr. Biden may not seem like a history-altering figure, certainly like less of one than Barack Obama did. But he could wind up presiding over a larger scale of political change than Mr. Obama did, for reasons largely independent of the two men themselves.

Ms. Boushey, who runs the Washington Center for Equitable Growth, argues that progressives are better positioned to pass sweeping change in 2021 than they were in 2009, after the financial crisis. Then, the only major policy area in which Democrats had a comprehensive, politically viable plan was health care — and, not coincidentally, it became Obama’s biggest policy success.

“Although you had this crisis, you didn’t have the ideas that were ready to go,” Ms. Boushey said. Today, by contrast, progressives have spent years working through the details of plans on climate change, high-end tax increases, antitrust policy and more. And while Obama’s team had only a couple of months to plan for taking office amid a national crisis, Mr. Biden’s team would have almost a year. “There is a whole vision that I think is ready,” Ms. Boushey added. “And there is a lot more runway.”

In less than 15 years, the United States has suffered the biggest two economic crises since the Great Depression, the worst pandemic in more than a century and the election of two presidents unlike any before them — and diametrically unlike each other. If there is a single lesson of the current era of American politics, it’s that change can happen more quickly than we imagined”.


Tim Worstall 07.10.20 at 1:30 pm

@ 14. Not in the UK.

Tax as %ge of GDP was 33.6% in 2007 – ie pre GFC – and 34.2% in 2017. That’s many things but it’s not a tax cut.


steven t johnson 07.10.20 at 3:41 pm

The Swabian housewife is not alone in “thinking” that a government is just another household and therefore should no more be allowed to print money than she is….that kind of thing is reserved to the superior beings called “bankers.” There really is no other way to say it: This nonsense is at best defective thinking where what is, is simply God’s ordained way. Or some secularized substitute like libertarian economics. Or simply lying.

But the real thing is, who says austerianism doesn’t work? The Swabian housewife, literal or figurative, thinks it’s working for “Germany.” I am not at all clear on why we need to attack MMT instead of austerianism.

Austerianism seems to be at heart about hard money, which is to say, about maintaining the wealth of creditors. As a theory, it’s hard for me to understand why only government deficits matter, rather than the de facto money creation by central banks, regular banks and shadow banks. (At this point, I can only conclude it’s a hangover from gold, which is the only true wealth. Apparently Adam Smith did live in vain!)

The vast sums created by the Fed are much larger than those created by the federal government, so in practice the economy in many ways has merely amped up its commitment to funny money supporting the stock market/shadow banks and banks. If this is not objectionable I see no reason to focus an attack on MMT.

I must confess I lost interest in John Quiggin’s Economics in Two Lessons when I realized that it did not have a definition of full employment. Neither does MMT, any more than it has a theory of profit, but it’s hard to see why MMT merits an attack now, especially since no one actually in power is advocating it. Or is this about keeping Democrats orthodox?

At any rate, to me it seems pretty obvious the true, unspoken for obvious reasons, definition of “full employment” used by orthodox and quasi-dissident economists is, the level of unemployment that leaves profit rates steady and the money keeping it’s value. The difficulties in actually calculating NAIRU or the depressing variability of the Phillips curve may make them unfashionable to say. Or maybe not.

If we want to talk SF, Heinlein’s Beyond This Horizon was pretty explicit about using government expenditures to preserve the value of money lest inflation deprive the rich of their virtue. Heinlein may have read Keynes, though it’s more likely it was Major Douglas. Of course, I recall Keynes had more kind words for the Major than he did Marx.


steven t johnson 07.10.20 at 10:22 pm

PS Tim Worstall@1 seems to think the performance of England in the early Thirties has nothing to do with the sterling area. This is not intuitive.

And also by the way, the notion of “full employment” where public debt crowds out private investment tacitly assumes physical capital and labor will will be properly distributed so that there are no production shortfalls causing issues, not even rationing ones. The example of war economies is suggestive.

And lastly by the way, anecdotal evidence suggests restriction of production and/or distribution is becoming widespread. If a WalMart ruthlessly prunes its shelves, leaving bare spots, it can raise prices less on what it does carry, no?


likbez 07.11.20 at 1:18 am

@Andres 07.09.20 at 9:52 pm 12

nothing as bad as the Great Depression took place in the 18th and 19th centuries

The Long Depression in the 19th century was the worldwide period of deflation that lasted from 1873 to 1896 and caused erratic fluctuations in economic activity in the U.S. and Europe. Unemployment in the USA reached 14%


nastywoman 07.11.20 at 4:07 am

”But the real thing is, who says austerianism doesn’t work? The Swabian housewife, literal or figurative, thinks it’s working for “Germany.”

It’s a bit more… complicated – as having enough cash saved for an emergency in times of crisis works for everybody in the World – and as the ”Swabian housewife” is/was always willing to forget about ”austerity” if it comes to save her ”fellow men” -(and especially if they are ”their fellow (southern) sisters and brothers” –

AS we ALL don’t want to let Venice sink – Right?


nastywoman 07.11.20 at 7:14 am

and about this “full employment”… thing –

As one of the major economic consequences of the Pandemic – is –
NO ”full employment” –
for many years –
shouldn’t we worry about that if – one day – something like that…
might be…


bruce wilder 07.11.20 at 7:51 am

For what little it is worth, Keynes would have been aware that Adam Smith’s ambitions for The Wealth of Nations led Smith to focus on specialization of labor as an explanatory force able to provide insight at the level of the village as well as international trade, in much the way gravity could be used to analyze the motion of planets and the falling of an apple from a tree. He would have been aware as well that neoclassical economics had picked up important elements of its apparatus from classical physics, particularly hydraulics. Setting up an expectation that he would be able to overthrow the classical (or more properly neoclassical economics) in some way analogous to the way in which it was popularly understood Einstein had overthrown Newton was certainly part of the campaign he undertook.

As James Galbraith says in the linked essay, Keynes failed in his ambition and subsequent scholarship adopted and adapted his teaching in ways that ultimately undid Keynes’s hopes of freeing money from the shackles of classical neutrality and the economy as a system from the dictum of general equilibrium. That failure to reform theory when the theory was and remains clearly wrong sets up curious expectations for any work that invokes the figure of Keynes as an expert authority, even if we accept as Galbraith suggests that the failure is as much the fault of those who came after as it may have been of Keynes himself.

As Professor Quiggin has written on previous occasions zombie ideas can have seemingly infinite after-lives in economics. Being wrong in economics means never having to say you are sorry. Mainstream academic economics prides its self on its “rigor” and logical vetting of ideas, but at the same time shows no inclination to reject false ideas, as long as they are the ideologically congenial false ideas. Individual economists sometimes can be seen to produce sophisticated professional work and embrace vulgar dogmas, while others tout vulgar dogmas as if they are sophisticated and insightful scholarship and receive only muted criticisms.

In a profession where loanable funds doctrine lives on and in which aggregate supply meets aggregate demand at a price level, brains have already been eaten. MMT has only attracted attention as it has become more idiotic. Would mainstream economics even bother to scorn a more sophisticated and empirically grounded theory?

If there are genuinely right answers in economics, and I would not expect most prominent economists to embrace such, those right answers usually take the form, “it depends” where economic theory (correctly) identifies factors involved, but not their values in the context and circumstances obtaining. That is the hard part for zombie minds: recognizing the actual, present context.

Vulgar economics is generally of the stopped clock variety, prescribing the same medicine for every illness and ailment.

If our case is new, then if we are to cope with circumstances as they are, we must, like Keynes, be willing to change our minds as the facts change. I have little hope.


Andres 07.11.20 at 10:52 pm

likbez @22: The Long Depression had a top 14% unemployment rate and also did not lead to a wholesale financial collapse. By 1932, Great Depression unemployment peaked at nearly 22% while most large banks had either failed or drastically suspended lending. Result: a new political-economic regime starting in 1933, whereas there was no political turnover during the Long Depression. I rest my case.


bruce wilder 07.12.20 at 5:05 am

I score that one for likbez. It is a matter of historic fact that at least two previous business cycle recessions in the U.S. had sufficient magnitude to qualify as “depressions” (a period when the apparent unemployment rate exceeded 10%) No one was actually compiling unemployment statistics and, in any case, urban industrial waged employment encompassed much smaller portions of the population in the 1870s than in the 1930s, making comparisons problematic. We do know real wage rates fell substantially in the 1870s and again in the 1890s, while industrial real wages actually rose during the New Deal. The business recession 1873-78, at roughly 5 years is the longest period of business contraction recorded. The depression of the 1890s encompassed two recessions and hit the Western U.S. especially hard. In both cases there were very high numbers of bank and business failures.


Fake Dave 07.12.20 at 11:28 am

The economic situation at the end of the 18th Century was also pretty grim with Britain and France both drowning in war debt, massive unemployment and social dislocation from enclosures and industrial agriculture, and a revival of extreme forms of public corporal and capital punishment to keep the underclasses in line. I don’t know what the appropriate economic terms are but it certainly sounds depressed and that’s before we get into the rampant cholera and frequent food poisonings.


steven t johnson 07.12.20 at 5:48 pm

Andres@26 writes “… there was no political turnover during the Long Depression.”

Unfortunately the repose of Andres’ case is disturbed by the political turnover of the defeat of Reconstruction, the so-called Redemption of southern states by the Democratic Party, the beginning of Jim Crow in the South, the defeat of huge labor strikes, the rise and fall of Populism, the beginnings of off-shore empire, the emergence of trusts. These things are political turnover.

I think it would be foolhardy to deny northern support for Reconstruction had nothing, nothing, nothing to do with not wanting to support troops in the South defending freedmen while trying to suppress labor and erect the cross of gold. It is always customary to counterpose “class” to “race,” for convenience in dividing the population. But however desirable this may be for those who want to sow confusion, I think it does violence to historical realities.

That said, likbez believes in crank anti-Marxist theories about the Deep State and economic nationalism, even if likbez is right on this one point.


Andres 07.13.20 at 2:37 am

Point taken: I forgot about 1876 possibly because I was thinking in terms of party turnover rather than political regime turnover. But: I would argue that though the economic downturn in the mid-1870’s helped make the Grant administration unpopular and gave the southern-led Democrats an opportunity to steal the election, it was the corruption of the post-Grant Republican leadership that was the true cause of the end of Reconstruction. Their desire to keep the presidency and the associated lock on federal economic policy was so strong that in the resulting post-election settlement they gave away almost everything else that mattered to the Southern states. If they had given up on the presidency but kept a pro-Reconstruction commitment, it is likely that they could have blocked most pro-Southern initiatives pushed by (hypothetical) President Tilden and company. So the largest cause of the 1876 regime change was political, not economic.


Michael Sullivan 07.14.20 at 5:16 am

As a possibly appropriate sidenote to Mary@8: I never cease to be amazed by how much of the nonsense spouted by people who use Adam Smith as a totem is thoroughly debunked in the writings of… wait for it… Adam Smith!

The wealth of Nations is pretty explicit about the idea that a sustainable free market is a product of a certain kind of light-handed liberal regulation, not something that is stable in a state of nature or complete anarchy. You don’t end up with a free market by letting powerful or wealthy actors do whatever TF they want (the modern libertarian/republican way). You get a free market by putting in place intelligent regulations that curtail monopolistic practices and exploitation of information asymmetry. This is explicit in TWoN.

Also, as Andres notes @12, Smith also clearly understands that “full employment” is not guaranteed and that employment/financial crises are real.

Comments on this entry are closed.