Monday, January 19, 2009

Demand for Aggregate Demand

(Mostly borrowed from a comment on another blog.)

Bryan Caplan has noted that Keynesian aggregate demand theories are enjoying a resurgence at the moment, but wonders why. My theory is that the political foundation of the American welfare state is in greater flux now than it has been for a long time. Let's go back a little bit. The philosophical and practical justification for the New Deal was to save people from complete destitution. As time passed, the welfare state grew but the justification behind it shifted away. Sometime between 1979 and 1993 say, the political establishment almost entirely gave up the idea that the point of spending on social programs is to help the poor.

The American people have adjusted to the idea that the safety net is there is smooth away the rough edges of life in a capitalist economy. (No comment on the underlying truth of that proposition, only that the perception of it is the political foundation of the contemporary American welfare state). That foundation is getting weaker. People are starting to figure out that what really want out of the economy is the opportunity to earn a living instead of welfare state protections. The academic and political left-of-center want to protect the welfare state, and Keynesian theories of aggregate demand is the tool for that particular job. Nobody needed that tool before now because the welfare state was built on political foundations that didn't require it.

This has, for me at least, some interesting consequences. Among other things, while Republican political strength is the lowest now that it's been in my adult lifetime, the mix of issues is the best it's been for five years at least.

One other thing: some of us cynics tend to view the typical theories of aggregate demand, deficit spending and fiscal surplus as an intellectual fig leaf for an assertion of social control by the political establishment over the population through government giveaways. And that is a substantial part of the story, though it's important to note, not all of it. So for that, we should thank libertarian economists like Tyler Cowen and the authors of Econlog, to sort through them on their own terms (as well as their political motivations).

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