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A Keynesian Moment? Hardly

Avinash Persaud

One cannot argue that the high unemployment today in the advanced economies calls for a Keynesian solution. Unlike the 1930s, which were characterised by high unemployment and large savings, it is hard to argue, yet, that unemployment now is stuck at a permanently high plateau and that we are in a prolonged slump. More importantly, we are not here as a result of persistently high savings in the high unemployment countries.

he problem with history is that if it is sufficiently distant in living memory, it is easily amended to justify the present. Demagogues and the chattering classes alike, all believe the weight of history is on their side. Those who argue that we must continue to aggressively prime the fiscal pump and that we need some mechanism like the recent United States (US) proposal to constrain surplus as well as deficit countries say that these are the lessons of the 1930s. History, they say, is on their side. Economist folk-hero John Maynard Keynes revolutionised economic thinking by arguing that the 1930s taught us that there were circumstances in which Adam Smiths invisible hand really was not there and where an economic slump and mass unemployment could persist without the economy righting itself. In 1936, when 200 workers set off from Jarrow to march the 300 miles to London, unemployment amongst insured people had been above 15% for five years. This average hid a number of sins, not least in the shipbuilding town of Jarrow.

The Keynes Story

A key part of the Keynes story was that precautionary savings could be stuck at too high a level creating an unemployment equilibrium. Uncertainty could be contagious. His policy prescription was deficit spending on public work programmes that increased confidence and incomes, especi ally of those that spent a great deal of their income. Given that persistently high unemployment was being caused by persistently high savings, there would be no shortage of savings to fund these programmes through the issuance of bonds. Moreover, shocking the economy to a higher employment level through government expenditure would generate the tax revenues to repay the bonds. Deficit spending would therefore not have deleterious effects in the long term and the greater macroeconomic stability that this fiscal

Avinash Persaud (apersaud@me.com) holds a number of governance positions in finance, public policy and academia in the United Kingdom and the Caribbean.

activism would bring could even boost long-term growth. Three cheers for Keynes. But this is not a Keynesian moment. Everywhere and at anytime, unemployment is a scourge, and today it has risen to painful levels from relatively low levels a few years ago. But it is hard to argue, yet, that unemployment is stuck at a permanently high plateau and that we are in a prolonged slump. More importantly, we are not here as a result of persistently high savings in the high unemployment countries. The countries with the biggest rise in unemployment are those where savings was at the lowest, least sustainable levels. Unemployment has risen as savings in these countries have begun to adjust to more sustainable, normal levels. If this is what is happening, and a new higher level of savings is the destination of that journey, then deficit spending will not shock the economy back to life; just postpone the point from which self-sustaining growth can resume. Governments should instead focus their efforts and perhaps use their more modest deficits on mitigating the effects of this adjustment on the poorest and most vulnerable in society. Nor is it a Keynesian moment in the currency markets. Some argue that while the US savings rate is low, globally there is a savings glut and so the adjustment needs to take place at a global level. The notion that the world is asymmetric, and that all the pressure to adjust is on deficit countries and not on surplus countries and that this asymmetry is structurally deflationary is a form of international Keynesianism. Keynes policy prescription was an international clearing union (ICU) where countries running surpluses would see these surpluses confiscated into a pooled reserve, thereby encouraging surplus countries to expand their economies and in so doing buy the goods of the deficit countries, restoring the level and mix of global growth Keynes was an iconoclastic thinker. But he was also a British nationalist fighting for Britain. During a meeting in Washington Halifax once whispered to Keynes, Its true theyhave all the moneybags; but we have all the brains. Keynes concern was that the country with the worlds emerging reserve currency, the US, was a surplus country

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november 27, 2010 vol xlv no 48 EPW Economic & Political Weekly

COMMENTARY

and Britain had become a deficit country. The ICU was really geared to the problem of having the world reserve currency being issued by a surplus country. This is a genuine problem as it is deflationary. Keynes solution was designed to offset that by the British nicking the Americans surplus. In the end they had more brains than Keynes and Halifax gave them credit for. But what happens if the world reserve currency is issued by a country in permanent deficit? This is expansionary. In this expansionary world and it is important to remember that as the US currency account deficit grew in the years in the run-up to the financial crisis, the world experienced its most rapid growth on record: five years of 5% plus growth is the right course of action in this context to expand further by demanding surplus

countries spend more? Keynes solution to the asymmetry is not symmetric. The critical problem of international economics is that every country is incentivised to come up with the right policies for that country, policies that promote balanced, sustainable growth, except for one country. That country is the one that issues the world reserve currency. That country is incentivised to spend more than it earns, and to fund that deficit by giving foreigners currency that they do not spend, but hold in reserve. It is like writing cheques that no one cashes. This is why when you look at global imbalances in dollar terms, it can be characterised as one large deficit, offset by a long tail of surpluses. The solution to this cannot be to force the tail to wag the dog. On what basis should the world impose constraints

on countries that are already incentivised politically to boost consumption of the local electorate and to improve their terms of trade and not to do the opposite? In danger of being a heretic, in the paper currency world, the bias at the international level is for inflation not deflation. Countries can protect themselves against that by appreciating their currencies against the reserve currency and if they are forced to do so on a regular basis the reserve currency will change. In that regard people should be careful what they wish for. The next reserve currency is likely to be the yuan the currency of the future largest economy and trader. If the issuer of the world reserve currency remains a persistent surplus country then we really will have a Keynesian moment.

Subalterns in Uttar Pradesh: A New Trajectory

A K Verma

The subalterns in Uttar Pradesh dalit bahujans are not a homogenised social denomination. They themselves are a highly differentiated and hierarchical social bloc facing intra-caste discrimination. The elites amongst the dalit bahujans are taking advantage of their numbers to claim continuance of reservation benefits and affirmative action programmes without showing any inclination to pass them on to the marginalised.

A K Verma (akv1722@gmail.com) teaches at Christ Church College, Kanpur.

ith assembly elections in Uttar Pradesh (UP) less than two years away, subalterns or dalit bahujans, i e, scheduled castes/scheduled tribes (SCs/STs) and Other Backward Classes (OBCs) seem to be taking a new trajectory, a development that may change the states electoral face. The emergence of caste parties the Bahujan Samaj Party (BSP) of dalits and Samajwadi Party (SP) of OBCs owing to the fragmentation of the electorate based on social cleavages against the backdrop of mobilisation by the All India Backward (SC, ST, OBC) And Minority Communities Employees Federation (BAMCEF) and Dalit Soshit Samaj Sangharsh Samiti (DS-4) and the second democratic upsurge leading to mandal, have since defined rules of the game. The rise of the BSP and SP was attri buted to the fact that the subalterns faced discrimination at the hands of the upper-caste dominated Congress Party and were not given their due share in the leadership structure. The erstwhile rainbow coalition of the

Congress, acquired during the freedom struggle, comprised all social denominations, but was steadily shattered during the 1980s and 1990s. Hence, when an o ppor tunity presented itself, these castes quit the Congress not only to avenge discrimination, but also to find new caste identities. The entire post-Congress system d iscourse hinged on equality and justice to subalterns.

Intra-Caste Discriminations
But as things unfolded, it came to be realised that the subalterns are not a homogenised social denomination. They are themselves highly differentiated and a hier archical social bloc with intra-caste discrimination. The dalits in UP are divided into 66 sub-castes of which the Chamars (also called Dhusia/Jhusia/Jatava) are most dominant and also consider themselves superior to the remaining 65 dalit sub-castes and indulge in discrimination against them (Verma 2001). These 65 sub-castes of dalits (known as ati-dalits) are further divided horizontally and there are prohibitions of roti-beti (bread and daughter) relations not only between Chamars and non-Chamar dalits, but also among many of ati-dalit sub-castes. The same is true of the OBCs. The OBCs in UP comprise 79 sub-castes and are d ivided into three categories: backward caste (BC) which consists of only one caste Yadav (also called Ahir/Gwala/Yaduvashiya),

Economic & Political Weekly EPW november 27, 2010 vol xlv no 48

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