The rise of status-quo Keynesianism in the age of coronavirus

Eli Cook, Haifa University, Israel 

After the Great Recession in 2008, Harvard economist Kenneth Rogoff became one of the leading voices calling for budget-slashing austerity. Despite the fact that central banks had pumped billions into banks and capital markets to keep the financial system afloat, when it came to hospitals, schools, welfare programs or infrastructure – Rogoff and many other mainstream economists suddenly were not so generous. Claiming (with what later was discovered to be highly dubious data), that any country with a national debt to GDP ratio above 90 percent essentially destroys its prospects for future economic growth, Rogoff became a central advocate for the kind of neoliberal austerity that decimated welfare states across the globe in the years after the 2008 crisis.[i] 

Fast forward a decade or so. Just as the coronavirus crisis was causing global capitalism to come to a screeching halt, the very same Rogoff sat down with PBS Newshour to discuss what should be done to save the economy. It quickly became clear that Rogoff was now singing a completely different tune. The interviewers soon noticed and asked:
 
You are someone who's worried about governments taking on too much debt. That's now not a consideration anymore?
 
Rogoff did not mince his words in response:
 
I would have no problem with the government debt magically going up $5 trillion in the blink of an eye, if we could get out of this in two or three months healthily.[ii]
 
This was quite the about-face. Since the 1970s, most mainstream, Ivy-League economists would not dream of saying such blasphemous things. Rather, they have argued that government debt was bad, and significant deficit-spending was even worse. In many instances, such economists have claimed not only that debt was bad for long-term growth but also that enormous outlays of public spending would only lead to that old bugaboo: inflation.[iii]  As an economist who worked at the International Monetary Fund (IMF) and sat on the Board of the Federal Reserve in the past, Rogoff was precisely the kind of economist who insured that both the United States and third-world countries did not stray from the neoliberal path of low inflation, low debt and low government spending. What was good for bondholders, in their view, was good for the world. As such, a nation’s credit rating mattered far more than their dilapidated roads or hospitals.
 
Yet now? Rogoff was speaking like the kind of 'heterodox' post-Keynesian economist that would never have gotten tenure at a top American university let alone sit on the board of the Fed or work at the IMF:
 
This is an emergency. You're not worrying about your credit standing right away. I don't think that's going to be a problem. And you know what? If we have inflation at the end of this, so what, if that is what we needed to do to win this war. We're trying to protect the American people, protect our interests, protect the future.[iv]
 
It is important to note that Rogoff is no outlier, but rather the reflection of a widespread trend these past few weeks. Across the economics discipline, the leading lights of the field have been rapidly shifting gears. What in the name of Milton Friedman was going on?
 
At first glance, it appeared that there might be a paradigm shift underfoot. Were the halcyon days of neoliberal ideology finally behind us? Had economists recognised that universalising the interests of capitalists might not be the way to the greater good and shifted to social-democracy? Was the coronavirus going to summon a new egalitarian economic epoch much like had occurred in the wake of the Second World War? Not so fast. I am not so sure that this is what Rogoff’s sudden reversal is really about. In fact, his comments reveal one of the most basic tensions that have always been present amongst the organic intellectuals of capitalist hegemony.
 
On one hand, neoliberal economists believe capital should rule society. Profit-seeking, income-generating private capital should be in the driver’s seat, be it in the form of allocating resources, spurring innovation, distributing wealth, supplying basic needs or determining one’s life horizons. As such, high levels of government spending which 'crowd out' private capital and push it to the side, or inflation which might eat away at the value of the unit of measure in which capital is accumulated, must be aggressively curtailed. Let us not forget that wartime inflation was one of the major reasons that the European rentier class was decimated in the first half of the twentieth century.[v]
 
Yet there is another side to the organic intellectuals of any hegemonic form of social organisation, and neoliberalism is no exception: the need to sustain and stabilise the status quo in times of great upheaval, so as not to bring about massive social dislocation that might threaten the very existence of the social order. Now in most instances, economists believe that such a stability can be reached within the confines of neoliberal policy. Such was the case, for instance, in the Great Recession of 2008. Stability was reached through the funneling of massive amounts of printed money into the coffers of large banks and financial institutions. While millions of ordinary citizens lost their jobs or even their homes, the neoliberal institutions which control our world were saved. The anemic recovery which followed, moreover, may have increased the massive disparities of wealth even more but it nevertheless stabilised the social order by supplying most citizens with a job. No doubt, these were bad, part-time jobs which hardly allowed one to make ends meet. But such was also the case before the 2008 crisis. Moreover, having people work till they are ragged is a key cornerstone of the relative social stability that has become a marker of the neoliberal era as workers don’t have time to organise and change society. The status quo, in short, remained intact without going against the neoliberal grain.
 
This time, however, it appears as if economists such as Rogoff are far less optimistic that society can be stabilised within the confines of conventional neoliberal tools of governance. There are two major reasons for this, in my opinion. First off, interest rates before the coronavirus were already practically at zero, so conventional monetary policy is simply not an option. Little can be done to 'sweeten' the proverbial pot for finance capital and thus induce it to invest in the economy rather than parking its money in the stock market as it has been doing for the past decade. Secondly, and most importantly, the unique circumstances of COVID-19 do not enable consumers to consume or workers to work at the same rate they did before the pandemic.
 
As such, it appears that alternative forms of economic management that are not dependent on neoliberal forms of market governance are needed in order to maintain the basic social order. Subsidising capitalists so that they push desperate people into the labor market is not going to work this time. And so, many nation-states have no recourse but to massively expand their fiscal budget and funnel money not only into banks, financial institutions and giant corporations (that, of course is still happening) but also to everyday people. This pragmatic fear of major social dislocation is the main reason why we have seen a massive uptick in government spending these past few weeks in nations across the world. In short, there has been, in my opinion, no paradigm shift away from neoliberalism. Rather, this is a temporary form of 'status quo Keynesianism' designed to save and stabilise the neoliberal order. 
 
One could rightly argue that Keynesianism has always been conservative. Keynes himself made it rather clear that he viewed himself as part of the liberal, bourgeoisie elite and his main goal was to try and save capitalism – and the class which rules it – from itself. He was not alone. From the 1930s to the 1970s, many elites came to support Keynesianism because they recognised that such policies protected their countries from far more dangerous upheavals – be they from the socialist left or the fascist right.
 
Nevertheless, I believe there is a sharp difference between the Keynesianism of old and the policies currently being peddled by the likes of Kenneth Rogoff. The main distinction is that while the old Keynesianism which emerged in the 1930s certainly wanted to conserve the basic social order, it did not want to maintain the status quo because it viewed the previous economic situation as thoroughly unstable. Major structural reforms were deemed necessary because most agreed that the free market could no longer be trusted to organise society. This is not the case today. Since the sudden eruption of the coronavirus is what economists refer to as an 'exogenous' shock, the sense amongst most economists is that things were doing just fine before the virus ruined everything. As such, there is no need for structural reforms to society. There will be no new institution-building. Temporary Keynesian policies are needed just to hold down the fort during the coronavirus crisis so everything can then go back to the way it was when the richest 1% in the world owned more than twice as much wealth as 6.9 billion people on planet Earth.[vi]  
 
To conclude, while it is important not to be naïve about what is going on amongst economists and policymakers, this is not to say that everyday people around the world cannot leverage the current situation in order to bring about a more egalitarian and just post-neoliberal world. Try as he might a few years down the road, Rogoff and friends cannot erase the comments they have made which reveal that they do not not actually think high levels of government debt or inflation are necessarily destructive to an economy or that credit ratings are the end-all and be-all of all macroeconomic policy. It will be difficult for neoliberals to put the genie back in the bottle and the citizens of the world mustn’t let them.

[i] See Carmen Reinhart and Kenneth Rogoff, 'Growth in the Time of Debt', American Economics Review 100 (2010), 573-378; John Cassidy, 'Reinhart and Rogoff Controvery: A Summing Up', New Yorker, 26 April 2013.
 
[ii] Economist Kenneth Rogoff on whether U.S. has ever experienced a crisis like this one. PBS Newshour, 19 March 2020. 

[iii] On austerity, see Mark Blyth, Austerity: The History of a Dangerous Idea (New York, 2013); On the centrality of inflationary fears to the centrality of neoliberalism, see Judith Stein, Pivotal Decade: How the United States Traded Factories for Finance in the Seventies (New Haven: Yale University Press, 2010).

[iv] Economist Kenneth Rogoff.

[v] On the rentier class in WW1, see Thomas Piketty, Capital in the Twenty-First Century (Harvard University Press, 2014).

[vi] https://www.oxfam.ca/news/worlds-richest-1-have-more-than-twice-as-much-wealth-as-6-9-billion-people-says-oxfam/.

Eli Cook

Eli Cook is Assistant Professor of History at the University of Haifa.