“Practical men…are usually the slaves of some defunct economist.” So said John Maynard Keynes, the hugely influential twentieth century economic theorist. Well, meet slave Michael Cullen.
A few weeks back Cullen declared: “The fundamental philosophy underlying my approach to fiscal management has been a simple but strict form of keynesianism.”
What did he mean by this? “Keynes’s essential insight into fiscal management which has remained of lasting relevance is his notion of the automatic stabiliser.
“As an economy picks up speed in the upturn of an economic cycle government revenue will increase above trend and expenditure moves below trend so that fiscal settings automatically tighten, slowing growth.
“As the economy enters the downside of the cycle, revenue tends to fall (or its rate of growth slows), expenditure increases, fiscal settings loosen and become stimulatory, thus offsetting the decline.”
If this is “keynesian”, it is indeed a “strict” keynesianism. It is lightyears distant from the corrupted post-Keynes keynesianism of the third quarter of the twentieth century.
Finance ministers throughout the developed world tried to enhance the stabilisers. This was called “demand management”. When private consumption slowed, the government spent to fill the gap or cut taxes to give consumers more money to spend.
The goal was “full employment”, initially to rebuild economies after the second world war. The result, eventually, was inflation — what some economists call “the great inflation” of the early 1970s, the very opposite of stabilisation.
The problem was twofold.
First, economics is not an exact science. Politicians could never get the timing or the amount right because the data they were using were out of date and in any case rubbery. By the time they acted, the economy was already moving on. Politicians often accentuated the swings instead of smoothing them.
Second, the art of politics is to accentuate the positive: “ups, ups and more ups”, as Charlie Brown, the “Peanuts” cartoon character, once said. Politicians were good at stepping on the gas but couldn’t ease off the accelerator when things picked up. It was a one-way ratchet.
By the 1970s Budgets had become a sort of magicians’ parade, interspersed with corrective “minibudgets”.
Let’s step back a moment.
Cullen’s hero is Arnold Nordmeyer, architect of the second Labour government’s 1958 “Black Budget” and, Cullen says, “the best Prime Minister we never had”.
Cullen has too much hair to be mistaken by sight for “Nordy”, as the onetime Presbyterian minister turned politico was both affectionately and unaffectionately known. Instead, many have remarked on his resemblance to Michael Joseph Savage, the 1930s Labour Prime Minister who flirted with pump-priming monetary reform.
More recently, however, Cullen’s visage has begun an eerie transition. Now he also looks just a little bit like Sir Walter Nash, Savage’s puritanical finance minister who balanced Budgets even during the second world war and was Nordmeyer’s Prime Minister from 1957-60. (This is not a visual comparison the self-described “liberal” Cullen relishes.)
To Nash the Budget was not Keynes but bookkeeping: raise enough in taxes to cover the spending. Cullen’s Budgeting is not dissimilar.
Cullen is determined to ensure revenue will cover expenses three, four, 10 years out. So the left chafes at his restraints on spending, just as the left (initially including Nordmeyer) chafed under Nash in the 1930s.
So why claim Keynes?
Keynes, while no socialist, provided an analysis and a mechanism by which moderate socialists could come to terms with capitalism, manage its vicissitudes and keep workers employed. Keynesianism was also saleable to voters in our sorts of countries; socialism’s eventually self-defeating slogan, “nationalisation of the means of production, distribution and exchange”, was not.
So Keynes has credibility among left-of-centre liberals.
But is Cullen “keynesian”?
He certainly increased spending in this month’s Budget. But not with the intention of offsetting falling consumer demand and business investment, which would have been a “keynesian” reason.
Similarly, he rejected tax cuts, which he said would be irresponsible in these uncertain times when government revenue might not hold up. In fact, he put taxes up on some alcoholic drinks (and surreptitiously by way of bracket creep). Not very “keynesian” that, heading into a downturn.
Contrast this with Peter Costello. The Australian Treasurer cut income tax in his Budget two days before Cullen’s, even though that effectively eliminated his surplus. And one reason Costello gave was that it would offset the coming consumer slowdown — as a “keynesian” might have urged.
Not all of what Costello did is at odds with Cullen’s thinking. Costello’s tax changes for foreign investors will affect business location decisions as between the two countries. So we can confidently expect Cullen either to match the tax changes or provide antidotes.
This was flagged rather vaguely in the Budget. But it is a matter of real concern to the man who heads the infrastructure group of ministers, which was set up because of concerns about discouragements to foreign investors. These are the realities of internationalism and of living next to a much bigger (even if small in world terms) neighbour.
But, that pragmatic alignment aside, Costello’s approach is different from Cullen’s. That difference reflects the divergent policy directions on either side of the Tasman: this one building state services, Australia’s favouring private choice and co-payments for social services (the deeper reason for the tax cut).
Costello has, of course, more benefit of the doubt from business, being in a conservative government, than Cullen, in a Labour government, has. Thus Cullen has to prove himself more fiscally prudent and has less room for “keynesian” manoeuvres.
But more to the point is that Cullen is not a “keynesian” — at least, not in the eyes of economic historians and theorists I have consulted.
Reliance only on the automatic stabilisers was never Keynes’s prescription. Quite the opposite: for him the stabilisers were an analysis, not a prescription. More was needed and it was needed from governments.
What exactly governments should do depended on the problem at hand. Keynes had a different prescription in the 1930s Depression, when he wrote the General Theory of Employment, Interest and Money, from that in his 1941 British Treasury memorandum, How to Finance the War.
Moreover, Keynes died in 1946, shortly after having developed the ideas which led to the Bretton Woods regime of fixed exchange rates, which expired in the early 1970s, and the International Monetary Fund, which didn’t. What Keynes would have prescribed to deal with the “great inflation” of the 1970s would likely have been very different from the distorted “keynesianism” of that dishevelled decade, played out here to its dead end under the misguided Muldoon administration of 1975-84.
And, we might add, 1970s “keynesianism” is mighty different from “Cullenomics”. If Cullen had done in 1973 what he did this month, he would have been declared rightwing.
So why is Cullen a self-declared “keynesian”, “strict” or otherwise?
He argues that the much greater size of the modern state gives the stabilisers greater effect than in the modest states of Keynes’s day. The stabilisers do at least some of the work governments would have had to do in an earlier age. But at most that might make him “neo-keynesian”, not “strict keynesian”.
The more convincing answer to why Cullen has claimed Keynes probably lies in politicians’ need for validating rhetoric.
Cullen needs “tradition” credibility in the Labour movement. Keynes provides that in two ways. To be thought “keynesian” places Cullen in Labour tradition. And it distinguishes him from the “economic rationalism” that replaced post-Keynes “keynesianism” in the 1980s.
And the “strict”? Well, that’s for tradition, too — the Nash tradition. And to soothe business. In case you hadn’t noticed.