The Rudd Government and the Return of Keynesianism

In November 2007 Kevin Rudd led the Labor Party back into office after 11 years of Coalition government.The Howard government had looked increasingly like it was failing to exercise the degree of fiscal discipline required to keep inflation from breaking out after an unprecedented 16 straight years of economic growth.Labor's challenge on assuming office was to achieve that requisite fiscal discipline while not reneging on its election promises -including over $40 billion worth of scheduled tax cuts over the next four years.Less than twelve months later, inflation was the last thing the government was worrying about as it launched a major stimulus package to stave off the rapidly mounting effects of the global downturn and released revised figures showing that the healthy surplus projected in its first budget was turning into a serious deficit.Not shying away from task, the government made it clear that it wanted people to spend and that it would do what was required to maintain effective demand.After a long absence, Keynesianism was back.The Rudd government's enthusiastic and determined embrace of Keynesianism re-opens longrunning questions about the scope and means for political control of the economy and the capacity for achieving 'full employment' in a capitalist society.Keynesianism is a touchstone of the left and there has always been a popular view that since the mid-1970s the full employment objective has been sacrificed on the altar of 'neo-liberalism': governments choosing to tolerate persistent and sometimes high unemployment when more humane approaches were available.This paper takes issue with that view, arguing that the return of Keynesianism has only been made possible by the unusual convergence of a number of necessary conditions.In doing so, the paper is influenced by Notermans' (2000) argument that parties of the left and their Keynesian policies are much more suited to times that call for macroeconomic stimulation than those where the price stability is the issue.It is important not to overestimate the contribution Keynesianism made to the post-war golden age and nor to underestimate its contribution to the 'great inflation' of the 1970s.Keynesianism emerged in the very particular economic conditions of the 1920s and 1930s and applies in only a highly qualified way to the very different conditions that have obtained since. Keynesianism and the 'Full Employment' ObjectiveIt is difficult to exaggerate the significance of the Keynesian revolution to politics and public policy.In the relatively short period of time between the end of the First World War and the end of the Second World War, it transformed our expectations of government -inventing the idea of macroeconomic management and making full employment a primary policy goal.The formative event behind this revolution in economic policy was the Great Depression, a downturn distinguished from anything that has occurred since by its depth, its duration and its deflationary character, as wellThe acceptance of Keynesianism represented a major watershed in Australian public policy as it did elsewhere.It was officially signalled by the release of the Labor government's 1945 White Paper Full Employment in Australia, a policy statement that followed the British lead and had Canadian and American equivalents. 2The White Paper's first pronouncement was that "Full employment is a fundamental aim of the Commonwealth Government".Following Keynes's emphasis on the demand side, it also declared that "governments should accept the responsibility for stimulating spending on goods and services to the extent necessary to sustain full employment".And, again following Keynes, it singled-out infrastructure spending as the most expedient way to boost effective demand."Public capital expenditure is the principal type of expenditure that can be readily varied to offset variation in the unstable parts of expenditure."Of course capital expenditure is actually not quite so 'readily' variable, and this was acknowledged: "Careful and detailed advance preparation will be required if public capital expenditure is to play a significant part in our development".On the risk side, the White Paper also acknowledged the danger of "unstable public finances" and the need to "ensure...that undue sectional pressure for wage increases does not lead merely to a rising spiral of wages and prices without any real benefit -and perhaps with disadvantage -to the workers themselves".Governments would have to keep public spending within bounds and build in mechanisms for controlling inflation. What's in a name? Keynesian and the LeftNotwithstanding the fact that Keynes's "patrician liberalism" (Pierson 2001:40) had no time for many of the core elements of social democracy, there has always been a decided affinity between Keynesianism and social democratic politics and policy.While some prominent exercises in Left Keynesianism -the Blum government in 1930s France and the Mitterrand government in 1980s France most notably -have been anything but successful, the affinity is strong.Arguably, it was Keynesianism that made social democracy viable: provided a way to square the circle of social reform in a capitalist economy by giving government responsibility for macroeconomic management and justifying progressive taxation, public spending and redistribution.Keynesianism thereby obviated the need for socialisation of the means of production (Holland 1977; also Whyman 2006:55).We would thus expect to find parties of the left far more likely to take an actively Keynesian approach to economic management than parties of the right, favouring full employment over price stability.Workers are most concerned about their jobs, the middle class about their savings.As Andrew Glyn (1998:2) puts it, "Maintaining full employment has been the centrepiece of social democratic programmes since the 1930s".The classical reference along these lines is Hibbs (1977), who advanced a two-fold proposition: first, as an economic fact, that the working class not only perceives itself as being best-served by low-unemployment/high inflation policies but is in actual fact best-served by such policies; and second, as a political fact, that left-wing parties govern accordingly.While this analysis has been supported by others (e.g., Cusack 2001; Hall 1989:376), more recent research suggests that it is much truer of Hibbs's period -the 1960s and 1970s -than 2 The British White Paper, Employment Policy, of 1944; the Canadian White Paper, Employment and Income, of 1945; and the US Full Employment Act of 1946.The American statement was the only one to assume any formal or legal standing; the others remained merely White Papers.That said, the American commitment to Keynesianism in the Full Employment Act was considerably watered down by the successful demands of business.

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