One of the basic tenets of Keynesian economics is the importance of aggregate demand or spending in the economy for the purposes of supporting growth and employment. This spending takes the form of consumption and investment in the private, public and foreign sectors for an economy open to international flows of trade and investment. Keynesians, particularly those claiming an intellectual lineage from the man himself, and often on the left of the political spectrum, place more of an emphasis on fiscal policy, or variations in taxes and government expenditure, than monetary policy, or variations in interest rates. Keynes himself emphasised both for the amelioration of the business cycle and the promotion of high levels of employment. However, he did think that in a deep recession or depression as took place across the world during the 1930s and also more recently, interest rates might lose their effectiveness in a so-called liquidity trap, and fiscal policy should in this case be used.
Support for Keynes’s ideas do tend to be found more on the political left or centre, but politicians of all persuasions have used expansionary policies when it suited them. Under Reagan in the early 1980s, the US government ran quite a large budget deficit generated by tax cuts justified by reference to ‘supply-side’ economics, and also increased defence spending. Along with the effects of steep cuts in interest rates, ‘morning in America’ took place as the economy recovered from recession and unemployment fell. Under Bush II and the recession of the early 2000s, tax cuts for the wealthy, initially promoted with similar arguments for ‘supply-side’ effects, were later justified as a boost to demand to counter the downturn. So right-wing politicians, although often disingenuous in their arguments, have, when the situation called for it, employed expansionary fiscal policies to try to boost the economy. These two examples were cases in which tax cuts for the wealthiest were carried out, so from the point of view of consumption were probably less effective than tax cuts for the poorest would have been, as the latter tend to spend a higher proportion of their income than higher earners.
But Keynesian ideas can find support across the political spectrum beyond the usual policy of state demand management. After all, private and foreign spending, as much as that by the government, are sources of demand and growth. In a deep recession, when private spending is tending to fall sharply, fiscal intervention may be helpful, but over the longer term, as Adam Smith observed, the ‘extent of the market’, or the potential amount of spending on goods and services, is a limit on economic output. In Japan for example, where the economy has stagnated for more than 20 years, continued fiscal and monetary stimulus has failed to provide a lasting solution and public debt is now well over 200% of GDP. There demand is held back by a high level of corporate saving and a failure of firms to invest efficiently. While this saving has been used to pay down debt built up during the 1980s bubble, it is likely that reform focused on the opening up of new markets will stimulate private investment. Thus structural or supply-side reform in the form of deregulation and changes to corporate governance could be effective in boosting private investment and consumption over the longer term, which would support growth, reduce the government deficit and the size of the public debt in relation to the economy. These sorts of policies are usually associated with more free-market economists, but their effect on demand can be supported by all sides. In this way, aggregate supply and demand can interact in a mutually supportive manner.
More often associated with the left, industrial policy, if effective, can play a role in stimulating private sector investment and productivity growth and, if targeted towards sectors which are potentially competitive internationally, can ultimately boost export growth. Growth in net exports (exports minus imports) provides a stimulus to aggregate demand and overall economic growth and foreign trade growth is a vital component of any sustained pattern of economic development. This sort of process is particularly necessary in the UK economy currently, in which domestic spending has recently been fairly strong, but a sluggish EU economy has been a drag on exports, leading to a current account deficit of 5.8% of GDP in 2014. As I have argued before in this blog, reducing the current account deficit is vital to any programme which is aiming to reduce both public and private sector debt in a sustainable fashion. The current Conservative government, now free of its Liberal Democrat coalition partners, may be about to abandon support for particular industries now that the Business minister is one who takes a more free market view. Carefully targeted spending on infrastructure can help private business, but public investment in research which is currently relatively low and has suffered under austerity, and forms of public-private partnership may well be part of any successful government strategy for boosting investment, productivity and growth, especially in exports. So industrial policy, which can be viewed as a form of microeconomic intervention in the economy, can promote positive outcomes in macroeconomic terms which both left and right could support if it proves effective. In the current sluggish world economy, competition for more limited new export markets will tend to be intense, and support for export sectors would be a vital policy tool.
Welfare policy, a concern of both left and right, although in different ways, also has an effect on patterns of spending in the economy. I have discussed the macroeconomics of welfare in this post, but while changes to taxes and benefits are often analysed for their effect on incentives and on distribution and forms of social justice, they need to be looked at from a number of perspectives. In macroeconomic terms, changes to private consumption and, through an accelerator process, the consequences for investment, can be just as important as microeconomic incentives for employees to work, and employers to hire and invest. One could well overwhelm the other in particular economic contexts, so the overall outcome can be complex to determine.
So public sector policies and the resultant private sector outcomes demonstrate an interaction between micro (individual and firm-level) and macro (economy-wide) behaviour which can be complex, but which sees overlaps between the traditional concerns of both left and right and grounds for non-ideological bridge-building. Moving beyond left and right may be too much to hope for, and instead of political consensus we may simply get policy theft from one side to the other. Politics remains an often downright dirty business!