Are There Automatic Stabilizers in the Economy?

In July 1944, John Maynard Keynes addressed the Bretton Woods Conference (pictured above) arguing in favor of government spending during recessions and depressions. The Christian Science Monitor has recently reported that Keynesian economics failed, in of all places, England where Keynes was born. Whether or not Keynesian economics is a failure, there is a bigger question of whether there are automatic stabilizers that keep the economy on course and, if not, should there be? Keynes' argument was that the automatic stabilizers did not work in the way envisioned by neoliberal economists. This is a particularly important question to answer in the aftermath of the Financial Crisis of 2007-2010.

This list of potential mechanisms for automatically stabilizing the economy is fairly short: (1) unemployment benefits, (2) manipulation of the Fed Funds Interest rate, (3) Keynesian deficit spending and (4) market discipline. The US Senate failed to extend unemployment benefits even though unemployment is still high. The Fed is at the zero-bound (interest rates cannot go lower without money essentially being free). In a reprise of Herbert Hoover in 1932, the "bond-vigalantes" are calling for a return to austerity to end deficit spending and bolster "confidence". And, a bubble in the housing market is what got us in to this mess in the first place (the opposite of a bubble is a deflationary collapse).

Paul Krugman recently took on the issue of unemployment benefits. Yes, unemployment benefits create mild disincentives for people to look for and accept lower pay or poorer quality jobs. The lack of job creation, however, trumps the incentive effects. The jobs aren't there and without unemployment benefits, consumption isn't there to create a recovery.

Deficit hawks on the right are arguing that it's time to "cut, cut, cut, irrespective of the economic consequences" according to Carolyn B. Maloney, D-NY. Interestingly enough, the argument for austerity is the same argument made to countries on the periphery of the world system going through debt crises. Republicans (e.g., Kevin Brady, R-TX) are even arguing that "the United States may experience a debt crisis similar to Greece." In other words, the government should step back and let the market that created the crisis solve the crisis through the discipline of unemployment and enforced hardship for the working class--even though with low interest rates and a high demand for government bonds, now would be a good time for the government to increase borrowing.

Sadly, the same arguments were made to Herbert Hoover at the start of the Great Depression by the American Banker Andrew W. Mellon: "...liquidate labor, liquidate stocks, liquidate farmers, liquidate real estate...it will purge the rottenness out of the system." Andrew Mellon vs. John Maynard Keynes: what do you think? One problem with deficit spending is the likelihood that a period of deficits will not be followed by a period of surplus. Although the Clinton administration did run surpluses, it seems we cannot count on Republican administrations to run surpluses in good times (their preference is to provide tax cuts for those at the higher end of the income scale). Given the effect that weird politics (conservatives actually aren't fiscally conservative) have on the "automatic stabilizers," Melon's brutal, heartless, Republican home remedy for recession and depression becomes ever more likely. And, "those who do not read history are doomed to repeat it".