James K. Galbraith: Why Not Keynes? Adam Smith’s disciples run America—and that’s the problem

James K. Galbraith is the author of The Predator State: How Conservatives Abandoned the Free Market and Why Liberals Should Too. He teaches Keynes at the University of Texas at Austin.

In the high crisis just two years back, the cult of John Maynard Keynes saw a dramatic revival. Deficits were acceptable, stimulus plans became law, books entitled Return of the Master and The Keynes Solution rushed into print. Enthusiasts spoke of a “new New Deal.” Today, although the economy has not recovered, and although unemployment remains near 9 percent, none of this remains.

Barack Obama declined to become a third Roosevelt. His Bernard Baruch proved to be Robert Rubin. There is no Wagner in the Senate, no Ecclesor Currie at the Federal Reserve. The agencies that harbored Leon Henderson and the young John Kenneth Galbraith do not exist. If Keynes were alive today and came to visit, one wonders who in official Washington would see him.

The new dawn of the Keynesian idea has gone dark.

That it was a false dawn goes without saying. People who had actually read and understood Keynes never came close to power. Those who did come to power under Obama were False Keynesians. They would support a “stimulus,” but only if it were limited and temporary. To Lawrence Summers, a two-year program met the definition of “sustained.” $800 billion spread over two years—about 3 percent of a GDP in free-fall—qualified as “substantial.” Ben Bernanke and Christina Romer, both of whom had reputations as experts on the Great Depression, were closer to Milton Friedman’s view of that matter—that the Fed did it—than to Keynes.

The False Keynesiansalso relied on forecasting models that were conceptually anti-Keynesian because they incorporated the notion of a “natural rate of unemployment.” The models assumed that economic recovery would occur, returning us to an unemployment rate near 5 percent after five years. This would happen—so said the models—no matter what the policies were. The models thus defied the commonsense perception that we were in a deep and systemic crisis. In 1930 Keynes wrote, “The world has been slow to realize that we are living this year in the shadow of one of the greatest economic catastrophes of modern history.” In 2009 we realized it. But our computers, and the technicians who ran them, overruled us.

As a result, policies were inadequate and the results fell short. In March 2009 I predicted in The Washington Monthlythat a temporary program—rather than strategic effort coupled with forceful financial reform—would not foster business investment and sustainable renewed growth. As the stimulus package wore off, the economic recovery would be slow. This prediction came true with disastrous political effects for Obama. And so the False Keynesianswent home—Romerback to Berkeley, Summers to Harvard. The reputation of Keynesianismis just part of their collateral damage.

After the midterm elections, all attention turned to the victors’ agenda: the federal budget deficit, the public debt, spending cuts, and the cause of “entitlement reform”—our Orwellian phrase for slashing Social Security and Medicare. How can we understand this march of budget-cutters and free-market fundamentalists? Where do their ideas come from? Unlike the Reagan revolutionaries of 30 years ago, they have no academic messiah, no newspaper apostles, and, so far as one can tell, no sacred text. “Monetarism” plays no role, nor does “supply-side economics.” They are not really “Austrians,” though some claim as much. If they are “slaves of some defunct economist”—then of whom?

The answers are not far to seek...