Post-War Keynesian Consensus Continues

Between 1945-1973 a post-war Keynesian consensus prevailed in most of the Western world. Largely based on Keynesian demand managment economics, it consisted of full employment (1-2%), moderate inflation (less than 5% in the 1950's but rising to around 10% in many nations in the late 1960's), strong trade union rights, an economic focus on fiscal rather than monetary policy and strong regulatory environment and depeding on the nation in question, varying degrees of neo-corporatist economic management (tripartite agreements between govt, business and unions).

The OPEC oil crisis brought the whole edifice crashing down with spiralling inflation and growing unemployment, stagflation, in other words.

Some economists however see that by the late 1960's problems were already emerging, with rising inflation, sparked primarily by overzealous fiscal expansion. In the US it was due to the Vietnam War in other nations it was done in an attempt to get even 'fuller' employment (below 1% ueempoyment).

This all led to the adoption of monetarism and supply-side economics in the 1980's ie Thatcherism and Reaganomics, etc.

What POD would be required to have the Keynesian post-war consensus still in operation today.

My own proposed POD would be where the limits of the consensus are not tested, ie policy-makers do not try and get unemployment below 1%, perhaps accepting a level of 3-4%, thus keeping inflation down. Also in boom times there must be substantial govt surpluses (rather than the constant deficits OTL).

Note: I am not an expert in economics am writing this from a more political angle. Comments by those with more economic expertise would be appreciated.
 
Also from the political angle, one of the problems is the use of a surplus. Full coffers trigger wishlists in government spending or tax cuts.
 
Also from the political angle, one of the problems is the use of a surplus. Full coffers trigger wishlists in government spending or tax cuts.

True, but there are examples of govts holding significant surpluses rather than debt. For instance despite very high govt expenditure the Norweigan govt holds as of the year 2000, govt assets of up to 60% of GDP, compared to a 2000 figure for the USA of a stock of debt of over 40% of GDP (the stock of debt refers to accumulated debt rather than annual deficits). Of course this is due to North Sea Oil, but it is notable that this windfall has not resulted in massive tax cuts or profiligate spending.

As for what to do with any significant surplus, perhaps having the govt have some form of statutory govt authority as an investment agency (In Australia where I live the govt has a Future Fund to finance public sector pensions; it receives payments from the govt but is relatively independent and free from political direction and has no direct ministerial control). So perhaps have say (if we're using the US as an example) have the American govt invest surpluses in other nations govt bonds or overseas business (overseas business if probably less controversial than investing in domestic business as it prevents allegations of 'nationalisation by stealth'. It would also increase American foreign policy clout, which would surely be seen as benefit by US govts of any political stripe).
 
Well for starters the US has run a surplus budget something like half a dozen years in fifty or so, regardless of supply-side or Keynesian, and therefore you're probably not getting one if the US sticks with Keynesian economics.

Another problem is entitlements. Nixon made social security and friends indexed and untouchable. Pre-Nixon the US handled its budget by cutting those kinds of programs, post-Nixon the US could not handle its budget full stop because those programs rose in cost automatically and could not be tampered with.

A third problem is defence. The war in Viet Nam was expensive as hell, and although it got cheaper for a short while both Carter and Reagan rapidly increased military spending which shot any attempt at a balanced budget (off-hand, if Reagan had kept military spending to inflation he would have balanced the US budget by his second term).


So.

The Viet Nam War needs to go. Butterflies from no war give us a chance to prevent entitlements, no war means military spending above inflation is affordable (as it isn't being used up right away in the jungles), and no war puts the US in a much stronger position when/if the oil shocks roll around.

Secondly the US needs to copy Japan. IOTL there was a lot of talk about it in the 80s which died when Japan hit the bubble. ITTL you need to have the US adopt the same closer connections between business and government and (in the US) labour.

If you take a look around in the Atlantic Monthly's newishly opened archives there are a lot of interesting articles about Japan (both pre and post bubble) and particularly about their way of approaching the economy. If the US were to retain Keynesian economics the government would have to adopt the Japanese approach.

Third, the conservatives need to lose. Big. Perhaps if Reagan loses (though we'd need somebody better than Carter) and a moderate wins the next cycle, but somehow the libertarian / business conservative wings of the Republican Party need to keep losing elections otherwise they screw our plan up.

Overall I'd wager the US is going to lose a lot of GDP growth and it still needs the de-regulation / re-regulation period that Clinton promised but only finished up the first half as started by Carter/Reagan. Rich people will probably decamp a little for greener pastures, investment will be lower overall, property taxes will look worse earlier (but, as with OTL, will probably persist in their evil ways), and more stuff I can talk about later.

At the end of the day the US is probably well worse off on a per capita basis, but the portion of Walmart to blue collar type jobs is likely in the ATL's favour (more and better decent jobs, less rich people, somewhat delayed/reduced small business and white collar jobs).

All of that aside, it's still darn near impossible to achieve such a result in the timeline just because it requires a series of unlikely events. If you ever do want a left-wank of the US check out Mitchell Freedman's A Disturbance of Fate which is "what if RFK lived and won and is followed by a crazy socialist president and then a moderate president whose slight moves towards a freer market plunges the US into Civil War". Yeah I know, but the first half is a pretty good book (though somewhat implausible) before it takes a sharp turn to crazyland.


(As regards Norway the only reason they have such a large surplus is because the law forcing North Sea profits into their reserves is a hard one to overturn. They like more spending and lower taxes just like everybody else. Canada is a solid example of a Western country where deficits have become fundamentally unacceptable, politically.)
 
Well for starters the US has run a surplus budget something like half a dozen years in fifty or so, regardless of supply-side or Keynesian, and therefore you're probably not getting one if the US sticks with Keynesian economics.

Another problem is entitlements. Nixon made social security and friends indexed and untouchable. Pre-Nixon the US handled its budget by cutting those kinds of programs, post-Nixon the US could not handle its budget full stop because those programs rose in cost automatically and could not be tampered with.

A third problem is defence. The war in Viet Nam was expensive as hell, and although it got cheaper for a short while both Carter and Reagan rapidly increased military spending which shot any attempt at a balanced budget (off-hand, if Reagan had kept military spending to inflation he would have balanced the US budget by his second term).


So.

The Viet Nam War needs to go. Butterflies from no war give us a chance to prevent entitlements, no war means military spending above inflation is affordable (as it isn't being used up right away in the jungles), and no war puts the US in a much stronger position when/if the oil shocks roll around.

Secondly the US needs to copy Japan. IOTL there was a lot of talk about it in the 80s which died when Japan hit the bubble. ITTL you need to have the US adopt the same closer connections between business and government and (in the US) labour.

If you take a look around in the Atlantic Monthly's newishly opened archives there are a lot of interesting articles about Japan (both pre and post bubble) and particularly about their way of approaching the economy. If the US were to retain Keynesian economics the government would have to adopt the Japanese approach.

Third, the conservatives need to lose. Big. Perhaps if Reagan loses (though we'd need somebody better than Carter) and a moderate wins the next cycle, but somehow the libertarian / business conservative wings of the Republican Party need to keep losing elections otherwise they screw our plan up.

Overall I'd wager the US is going to lose a lot of GDP growth and it still needs the de-regulation / re-regulation period that Clinton promised but only finished up the first half as started by Carter/Reagan. Rich people will probably decamp a little for greener pastures, investment will be lower overall, property taxes will look worse earlier (but, as with OTL, will probably persist in their evil ways), and more stuff I can talk about later.

At the end of the day the US is probably well worse off on a per capita basis, but the portion of Walmart to blue collar type jobs is likely in the ATL's favour (more and better decent jobs, less rich people, somewhat delayed/reduced small business and white collar jobs).

All of that aside, it's still darn near impossible to achieve such a result in the timeline just because it requires a series of unlikely events. If you ever do want a left-wank of the US check out Mitchell Freedman's A Disturbance of Fate which is "what if RFK lived and won and is followed by a crazy socialist president and then a moderate president whose slight moves towards a freer market plunges the US into Civil War". Yeah I know, but the first half is a pretty good book (though somewhat implausible) before it takes a sharp turn to crazyland.


(As regards Norway the only reason they have such a large surplus is because the law forcing North Sea profits into their reserves is a hard one to overturn. They like more spending and lower taxes just like everybody else. Canada is a solid example of a Western country where deficits have become fundamentally unacceptable, politically.)


In regards to the budget deficit issue, perhaps so sort of Consitutional Amendment regarding this. Not the attempted Balanced Budget Amendment OTL, but instead perhaps a policy prohibiting overall budget deficits over a 10-15 year period( OTL UK under New Labour has voluntarily this sort of policy, deficits are OK, but over a 10 year period the culmulative budget must balance.)

Basically IMHO the death knell for Keynesianism was the extended period of stagflation after OECD 1973. This stagflation was particularly bad in Anglophone nations which also became the most supply-side afterwards.

So, my POD would be for late 1973 onwards govts to adopt very restrictive policies immediately. In OTL it only took govts in the UK/USA in the early 1980's a couple of years at most to control inflation, so in ATL by sometime 1975, inflation would be under 5%. Although this would require a break with Keynesianism, it could be styled as an 'austerity period' after which demand managment policies could be resurrected. IMHO this would allow Keynesianism to not fall so fully out of favour.

It would also be interesting to know the butterflies of this ATL. If inflation was knocked out by mid-1970's and the economy got back on track under demand managment, what would be the fate of Reaganomics and Thatcherism?
 
Top