Alan Nasser writes at CounterPunch:
From Cambridge University in 1932-1933, John Maynard Keynes observed a promising new U.S. president presiding over what he saw as half-baked and confused policies, while labor insurgency was mounting. Roosevelt’s measures were, Keynes conceded, without precedent, but novelty was not enough. Long-term commitment to direct federal employment was required. For Keynes, this was the bottom line. (For a detailed analysis of Keynes’s prescriptions for eliminating unemployment, see Alan Nasser, “What Keynes Really Prescribed,” CounterPunch subscription edition, volume 19, number 19, 2012)
Existing programs were not only too small, but they were also either temporary (Civilian Conservation Corps and Civil Works Administration) or irrationally tied to the severely weakened states’ ability to raise substantial revenues on their own (Federal Emergency Relief Act and Public Works Administration). CWA had come closest to the kind of commitment Keynes thought indispensable, but it suffered two fatal defects: it was temporary, designed only to help workers get through the harsh winter of 1933, and of all these programs it was the object of Roosevelt’s greatest suspicion. Roosevelt feared that CWA would raise workers’ expectations of what they could permanently expect from government.
The Dawn of the New Deal and Keynes’s 1933 Letter
The president’s instincts were solidly anti-federalist; there must be no permanent direct government provision of what it is the proper function of the private sector to provide. (1) Roosevelt wanted relatively small, temporary federal efforts on behalf of workers, with the states primarily responsible for the provision of social benefits in the long run. Keynes urged large, permanent programs supplying employment during both economic contractions and expansions, provided directly by the federal government. He communicated his concern to Roosevelt in an open letter published in The New York Times on December 31, 1933. (2)
In the letter he expressed his extreme distress at Roosevelt’s timid policy. “At the moment your sympathizers in England are nervous and sometimes despondent. We wonder whether the order of different urgencies is rightly understood, whether there is a confusion of aim, and whether some of the advice you get is not crack-brained and queer.” He then outlined his alternative analysis.
The basic issue, Keynes insisted, is “Recovery,” whose object is “to increase the national output and put more men to work.” An increase in output depends on “the amount of purchasing power… which is expected to come on the market.” Recovery depends upon increasing purchasing power. There are, Keynes pointed out, three factors operating to raise purchasing power and output. The first is increased consumer spending out of current income, the second is increased investment by capitalists, and the third is that “public authority must be called in aid to create additional current incomes through the expenditure of borrowed or printed money.”
Since the vast majority of consumers are workers, increased consumption expenditure is impossible on the required scale during a period of high unemployment and low wages. Business investment will eventually materialize, but only “after the tide has been turned by the expenditures of public authority.” Government investment in employment-generating public works must come first. Only after large-scale government investment can private investment be expected to kick in.
A compelling logic is implicit in that observation. According to the orthodoxy Keynes is criticizing, a revival of aggregate investment by the class of capitalists is necessary and sufficient to constitute recovery. But investment by an individual capitalist in a severe downturn would be irrational. So each capitalist will defer investment until there is evidence of recovery, i.e. evidence that the other capitalists have undertaken productive outlays. Uh-oh: a structural contradiction is in place. If each investor refrains from investment until all the others invest, no capitalist will invest. Each will die waiting for the others to come across. In the absence of an external impetus to the private investment system, the depression will be endless. Recovery is possible, then, only if a force external to the private market gets the ball rolling. Enter government to the rescue. “[T]he tide has been turned.”
Hence Keynes’s conviction that only government expenditures on a grand scale can breathe life back into a depressed economy. Keynes suggested as an example of what he had in mind “the rehabilitation of the physical condition of the railroads.” He would later, in a 1938 letter, recommend a national program of public housing as a project on the required scale.
The crisis was not merely economic. Keynes had witnessed the rise of revolutionary movements in response to the protracted inability of capitalism to meet the needs of working people. He had written about both the Bolshevik revolution and the tendency of austerity to spawn revolt from the Right. Keynes was antipathetic to both fascist and worker rule, and feared revolutionary consequences should the New Deal fail. “If you fail,” he wrote Roosevelt, “rational change will be gravely prejudiced throughout the world, leaving orthodoxy and revolution to fight it out.” The political stakes were high, as they must be under conditions of protracted capitalist austerity.
The stakes are no less high now. The current contraction emerged from a political-economic settlement, the post-Golden-Age period from 1974 to the present, resembling in relevant respects the Depression-prone economy of the 1920s.
Read more here.