The Political Economy of High Unemployment

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Mark Thoma points to a 1943 essay (PDF) by Michael Kalecki on the “Political Aspects of Full Employment” that rather presciently predicts that in the case of a severe slump the political authorities will not, in fact, take steps to bolster aggregate demand in a sufficient way:

In this situation a powerful alliance is likely to be formed between big business and rentier interests, and they would probably find more than one economist to declare that the situation was manifestly unsound. The pressure of all these forces, and in particular of big business—as a rule influential in government departments—would most probably induce the government to return to the orthodox policy of cutting down the budget deficit. A slump would follow in which government spending would again come into its own.

Thus at a time when many thought the experience of 1937-38 would teach people not to repeat those mistakes, Kalecki predicts that the experience will be repeated with governments only pivoting back to expansion again if things get really severe.

I think the key move you need to make to apply this analysis to the political economy of today is to understand that Social Security and Medicare have more or less made old people into a rentier class writ large, with even the least-affluent seniors largely insulated from the ups-and-downs of the labor market. At the same time, this demographic has become the key pillar of conservative opinion today. The fly in the ointment, in theory, would be that conservatives generally support dismantling Social Security and Medicare. The solution is the current set of proposals to cut Social Security benefits for younger Americans while making sure today’s seniors and near-seniors get paid in full.