The Limits of Keynesian Capitalism

A favorite writer of mine, John Aziz (@azizonomics), said he believed in “luxury robot Keynesian capitalism” as a response to me saying I believe in “luxury robot communism.” Compared to the status quo, luxury robot Keynesian capitalism sounds great. But can we do better? (Let’s focus on the “Keynesian capitalism” part, as the “luxury robot” part doesn’t need a defense.)

Keynesian capitalism vs. non-Keynesian capitalism

As I understand it, Keynesianism is a form of capitalism where the government acts as the economic manager, deploying fiscal and monetary policy to smooth the boom-n-bust cycle. Mismanaged business cycles, over the long run, lead to a poorer, less efficient economy—and a lot of human suffering.

In Keynesianism, the government’s main role as economic managers is balancing the aggregate amount of demand over time. Too little demand leads to less spending which leads to less income for others, which in turn amplifies the problem of deficient demand. Without the government giving money to those in need, demand craters and can fall to a “liquidity trap” and endless depression. Similarly, too much demand can lead to runaway inflation, wrecking budgets and plans to invest for families, businesses, and banks.

For the most part, capital owners support policy that promotes low and stable inflation. That’s because such policies require government spending, and the money supply, to grow slowly—if at all. Combined, both policies benefit those that own lots of money and especially those who lend out their money in exchange for getting paid interest. 

So when demand and inflation get too high, such as the 1970s, capitalists support the government’s fixes of macroeconomic problems.

But what about when demand drops too low? In such times, Keynesianism promotes policies that—if successful—increase inflation: balloon the supply of money and the amount of spending. A welfare regime helps as “automatic stabilizers”: when a mass of workers lose their jobs and risk throwing the economy into a tailspin, they can instead receive welfare (say, unemployment insurance) and continue spending money on stuff that others take as income. 

Overall—sounds great! A capitalist economy constrained and guided by a government to repress its most damaging traits. Why would we need something more?

The answer is power and the way it’s distributed in capitalist countries.

Free markets are always threatened by owners of capital

I earlier mentioned capital owners support one half of Keynesianism—the half used when demand gets too high. While they favor this half, they fight the other half—the one used when demand dips too low.

High taxes must exist to build up a robust welfare state, which must exist to automatically stabilize the economy. Aggressive monetary policy and jobs programs create and match work for workers, but such policies inflate away future debt payments to lenders and weaken bargaining power for managers and owners, at the same time their taxes are high. As such, these policies become targets.

Capital owners have a rap sheet where they undermine government regimes that have progressive taxes, pro-worker labor market programs, and a monetary policy where employment and prices are mandated as equal goals.

source: data from Piketty, Saez, Zucman (2016); Graph from Matt Bruenig

Capitalists also tend to be a small bunch (see graph above). Their ownership begets disproportionate power, which they wield to mold markets and government. Capitalists use their resources to buy and block competitors, giving them enough leverage to set prices and wages. They can push politicians around to favorably tilt the economy, including by undermining Keynesian policies. They can threaten to “Go Galt” and exit the economy until they get what they seek. In fact, this describes well the trends since the 1970s:

source: data from Piketty 2014; Graph from New Yorker

The way out requires disempowering capital owners to the point where their share of power equals their share of the population—at which point the ownership of capital becomes democratized. I.e. not capitalism. 

Democratization of capital for the win

Once capital becomes democratically owned, its profits can be universally distributed—building a foundation of health care, family care, housing, food, education, and basic income. Such a regime—combined with other civil, political, and economic rights—would maximize everyone’s freedom to the participate on fair terms in markets, politics, and society. 

Union Density vs. Collective Bargaining Coverage

Policy Righteousness vs Political Efficacy

Age limits on voting make no sense

If I were Dictator...

With power, I would dramatically reshape America. 

In general, I think neoliberals are right that the private market is the best engine for growth and rising living standards, and that government regulation, ownership, and intrusion distorts and reduces economic efficiency  However, this is not absolutely true--some markets require heavy government regulation (finance) to protect capitalism from itself and some markets (health care insurance) just don't work as well as when they are government-run. The power of capitalism also creates temporary and permanent losers who need to be shielded from the creative destruction of the market. This is a moral issue, but also an economic one: cushioning the blows from capitalism allows the "losers" to more quickly reintegrate into the market, which leads to long-term economic growth. Strong social safety nets also create freedom since they reduce economic risk and therefore encourage otherwise uncertain but potentially beneficial investments. I.e., if you have job with benefits, you may not want to quit it to start your own business if that means you have to go without health care for you and your family. Economic growth is also not the sole purpose of public policy--equality is important as well. 

I also think the libertarians are right that personal freedoms should not be infringed upon unless the social costs are too high (i.e. "negative externalities"). This is why I think drugs, prostitution, and gay marriage should be legal...but guns shouldn't be. 

Finally, American political institutions are a total mess and need radical reform.

So, if I had the power, here's how I'd change America:

Economic Policy:

1. The Fed should drop inflation/unemployment targeting and switch to NGDP Growth Targeting: This would greatly smooth out the volatility of the business cycle and make steep economic downturns unlikely and short-lived. 

2. Health care insurance should be provided for everyone by the federal government (Single Payer System). Private insurance companies can provide supplemental insurance. This would expand coverage, reduce costs (due to increased bargaining power and lower administrative costs), remove these costs from private business (since they are no longer paying for insurance), and remove all volatility in coverage (i.e. losing health care insurance after losing your job).

3. Overall taxation should be more progressive and shouldn't have arbitrary brackets, but instead a granular taxation rate (i.e. every additional dollar taxed at a fractionally higher rate).

4. Eliminate all income taxes (personal, payroll, corporate) and capital gain taxes. While currently necessary to fund our government, they are far from ideal. They distort incentives in anti-growth ways and are overly complicated, therefore wasting money and time on filings and rewarding trickery. 

5. Switch to a consumption-based taxes (that are modified so they remain progressive). This would be our new main source of revenue. They would include a Value Added Tax and a "Income minus savings and investments" tax that is progressive. These taxes are the most simple, hardest to dodge, and have the fewest economic distortions.

6. Install a financial transaction tax. This isn't necessary to raise revenue (although that's a bonus), but to throw some sand in the gears of a financial system that is too fast moving and reduce financial volatility.

7. Increase the gas tax and chain it to inflation. Needed to help fund infrastructure and gas consumption is an activity that should be discouraged. 

8. Eliminate all tax breaks (including for owning homes, marriage, etc.). These are hidden spending programs, most of which are harmful, and on the aggregate are definitely harmful. They also overly complicate tax filing, which is again wasteful.

9. Eliminate agriculture subsidies. Terrible policy that mostly benefits those who don't need it, makes us fatter, and increases the national deficit. 

10. Eliminate minimum wage laws. Given current political constraints, I support a high minimum wage, but it's not the ideal policy to reduce poverty and raise living standards. It raises the cost to do business, which is passed along to the consumer and the unemployed (or eats into profits), and isn't the best way to target those in need.

11. Expand unemployment insurance. It should be more generous and lengthier--this is a main cushion against the inevitable problems of capitalism and is also a powerful automatic stabilizer of aggregate demand (Keynesian policy without all the politics!)

12. Install a "guaranteed minimum income" law (to reduce poverty and cushion employment adjustments). Everyone, given a few requirements (such as citizenship, employment, college, or attempts at employment, etc.), should receive a minimum amount of money (maybe something like $15 - 20,000). This would be done via direct government cash transfers. Yes, this will de-incentive some to really look for work or really work hard for a raise, but this is not a wide spread problem and is drastically outweighed by the moral and economic benefits.

13. Increase capital-to-debt requirements for banks that go higher with more systemic risk they pose. Instead of outlawing "too big to fail banks," which do benefit from economics of scale, try to prevent their systemic risk.

14. Specify that financial institutions that do need to be bailed out are done so on very onerous terms: wiping out shareholders, nationalizing, etc. The government should absolutely always bail out companies that pose systemic economic risk, but should minimize moral hazard as much as possible. This does that.

15. Reduce defense spending dramatically. Maybe something like 2-3% of GDP. It's currently around 5%, double the world average and makes up over 40% of world defense expenditures. This is wasteful and probably needlessly encourages military endeavors that do more harm than good (see: Vietnam, Iraq, etc.).

16. Create an independent "infrastructure bank." Staffed by public policy experts, this would have its own large budget and would be charged with targeting worthy and needed infrastructure projects (HSR, highways, smart power grids, etc.). 

17. Strengthen unions via card check rules, eliminate "right to work" laws, and other measures. Maybe even create sector-wide unions who represent all workers in that sector (i.e. Sweden). Probably less needed if all the other stuff on my list existed, but they do help address economic and political inequality since workers face greater collective actions problems than business. 

18. Install congestion fees on busy freeways and roads. Road space is a scarce public good and should not be given away for free. When its most in demand, it should be most expensive. This would raise revenue, incentivize less driving, and dramatically reduce traffic (saving time, money, energy, and sanity).

19. Deregulate many zoning laws. Most of these creative terrible incentives, raise property costs, and make cities less efficiently designed. 

20. Universal pre-K education. A good investment for future productivity gains.

21. Government(s) should fund all public colleges and universities and make tuition free. A good investment for future productivity gains.

22. Aggressive pro-immigration policy. Working-age population growth helps fund the government and leads to long-term productivity gains.

23. Aggressive expansion of free trade zones. Free trade good.

24. Abolish the United States Postal Service - Not really needed anymore.

Politics:

1. Eliminate the United States Senate - Not needed, dysfunctional, and distorts public policy towards areas where most people don't live.

2. Eliminate the Electoral College and replace with national popular vote - All together stupid. Makes voting a pointless exercise for most, incentivizes campaigns to spend all their time and energy in narrow parts of the country, and can lead to anti-democratic outcomes (see: George W. Bush).

3. Install proportional representation for the House - Eliminates problems of Gerrymandering, safe-districts, and wasted votes. Allows for some 3rd party representation.

4. National holiday for election days - Voting should be a celebration and made as easy as possible. Giving the people the day off does both. 

5. National early-voting by mail and the internet (if it's proven sufficiently safe). Again, voting should be as costless as possible and waiting in long lines is a big cost (particularly for minorities who Republicans don't want to vote!). 

  

6. Supreme Court term limits - I don't really see the point of lifetime appointments--allows people to hang around too long and time up their retirement to benefit their party. Give them 20 years--that's plenty of time to learn the job and become an absolute expert.

7. Eliminate presidential term limits - We have term limits in the wrong place. Unlike the Supreme Court, we already have a de facto term limit on presidents: elections. Presidential term limits are not needed and are anti-democratic.

8. Eliminate debt ceiling - Dangerous, serves no purpose, and inherently illogical.

9. Eliminate Hastert Rule in House - Pushes public policy towards the extremes. Anti-democratic.

Social Policy:

1. Legalize gay marriage - Or just get the government out of the marriage business all together, grant civil unions to straight and gay couples alike, and allow private institutions to do their own ceremonies. 

2. Legalize marijuana - A mostly harmless drug (both personally and socially) who's illegality benefits criminals, wastes public resources, criminalizes non-criminal behavior,  and infringes on personal liberty for little reason.

3. Legalize or Decriminalize all other drugs - Unlike marijuana, most other drugs are sufficiently harmful that we should try to reduce their consumption. But they should be treated as health problems and infractions. I'm less sure on whether they should be legalized or merely decriminalized.

4. Legalize prostitution - Prostitutes should should have the same rights and protections as any other worker (including unions!). Illegal prostitution probably reduces the overall prevalence of prostitution, but does so at great costs by making it more unhealthy, exploitative, and violent.

5. Ban all guns (or at least all hand guns and high-powered rifles) and institute a national buyback program to try to get existing guns off the street - While guns and hunting do have important family and cultural connections, they impose severe public costs. Yes, such draconian measures will not eliminate guns and gun violence, and the imminent arrival of 3D printers will make it that much harder to eliminate guns, all measures should be done to reduce the amount of guns in society.

Foreign Policy (I'm least interested in this...):

1. A general liberal-institutionalist outlook grounded in conservative, pragmatic realism. I'd try to strengthen international institutions so the U.S. doesn't have to be the World Police. I'm too ignorant to have specifics on how this is done.

2. I'd like to promote democracy and capitalism where its lacking, but I'm not sure how that's done effectively. Intervention doesn't seem to work, so perhaps "leading by example" and grass-roots support for pro-democratic groups and organizations.

3. Reduction if not elimination of troops in taking out terrorists.

4. Relative increase in drone attacks used for targeted killings. Must come with greatly increased transparency on how applied to American citizen terrorists. 

5. Much more balanced approach to the Israel-Palestine conflict, including explicitly criticizing Israeli actions.

That's all I got for now. I'm curious to see how I change over time. I wish I wrote something like this 10 years ago so I could laugh at my younger, dumber self.