For ages we’ve seen an alliance between a pragmatic, basically scientific technocratic economics and conservative pseudo-economics. The former has always been essentially neo-classical-Keynesian and fairly empiricist. The impact of monetarism and the ‘new classicals’ on technocratic economics – the economics of Treasuries, central banks, the IMF, etc. – has been much exaggerated. But for a long time there wasn’t much of a difference between the technocrats’ practical policy and that of the conservative ideologues. What we’re seeing now is a divergence, and we see that the real power lies with the technocrats; conservative pseudo-economics falls whining to the roadside.
The ‘balanced budget’ ideology has its roots in the naive view that government finances are analogous to private finance, that deficits are reckless ‘spending beyond our means’ that ‘the taxpayer’ is one day going to have to pay back, and so on. But governments don’t really face a budget constraint. In boom conditions, balanced budgets and surpluses were technocratically rational for macroeconomic reasons however, so spreading the false idea that always balancing the books was a good idea for common-sense prudential reasons was useful to the technocrats.
It’s no longer a useful idea, and the balanced budget ideology becomes a political drag. You can sense its presence in all the headlines that had Rudd ‘admitting’ there would be a deficit, despite the journalists being hard-pressed to find a credible economist who thought it bad policy. It has still, of course, been running rampant through the opinion pages. And no doubt there is a fairly large proportion of the population that believes this stuff, or at least has a gut feeling that there’s just something dodgy about government debt, whatever the economists say.
Then there are the more sophisticated economic arguments. These acknowledge that the battleground is not the government accounts themselves but their interaction with the whole economic system. The ‘crowding out’ arguments on so many tongues in the 1970s and 1980s held that government deficit spending would be macroeconomically useless because it would simply displace the same amount of private expenditure. It does this either financially, because the government is borrowing from a limited pool of funds, or in the ‘real economy’ by pulling workers and other resources away from private employment. In some conditions there is something to the crowding out argument, at least in the latter form, and no-one doubts that in conditions of full employment, extra spending will raise prices rather than output. (Though there are devils in the definition of ‘full employment’, and anyway, we might rather have the public spending than the private.) But in conditions where private investment is holding back, it doesn’t make any sense unless you deny the reality of involuntary unemployment.
Then there is the even less-convincing argument from ‘rational expectations’: that deficit spending is useless because taxpayers anticipate the future repayment of debt via future taxes and save accordingly. Even if you think people generally behave in this way – and personally I think it’s ludicrous – it does not rule out an impact from the expenditure, because people can rationally expect the future taxes to come out of future higher incomes.
Anyway, these kinds of arguments have been valiantly put forward by certain economists and whole armies of credulous conservative op-ed writers the world over. But their star has been falling because the technocrats have better arguments, and because the deficits are coming anyway, no matter what policymakers think. This has emboldened the technocrats within academic economics to stick the knife into the crazier elements of their discipline, the monetarist remnants, the new classicals, Hayekians, and so on. Witness the open civil warfare which has broken out in big-name American economics between the ‘freshwater’ (i.e. Chicago and mid-Western) and the ‘saltwater’ (coastal) economists. Paul Krugman has been particularly merciless in persecuting the Chicago School likes of poor Eugene Fama, likening him to a biologist who is not only a creationist, but one who is completely unaware of the existence of evolutionist arguments.
What we’re seeing is not the ‘end of neoliberalism’, because most practical neoliberals never ditched the idea of stimulatory spending in a downturn. We’re just seeing the widening of a split between technocrats and ideologues. The ideologues have become an obstacle to policy which is functional for capitalism; they are being cast adrift, but no doubt they’ll be useful again.