Until about Sept. 20, 2008, the day Henry Paulson asked Congress for a $700 billion blank check, most of us probably thought we had a decent layman's grasp of how the economy works and how it grows.
Something like this: Buyers and sellers meet in the marketplace and strike their best bargains. Those may not always turn out to be perfectly fair or wise, but consumers generally know better than the government. Growth comes from the efforts of savers and entrepreneurs, so taxes on them must be kept low. Few argued about this stuff. Liberals just wanted to put a bigger social safety net underneath the markets; conservatives, not so much.
Now that all hell has broken loose, none of that seems obvious anymore. Consumers and businesses know what's best for them? Allow us to introduce the erstwhile homeowners of San Diego and Las Vegas, and the MBAs of Citigroup (C, Fortune 500) and Lehman Brothers.
The conventional wisdom about economics is up for grabs right now. We're not speaking here of the conventional wisdom in the economics profession - that moves pretty slowly, and is anyway less wedded to a caricature of infallibly rational markets than most people think. We mean the assumptions that lawmakers, businesspeople, journalists, and educated voters use when they talk about economic problems. Ideas that had been banished to the dustbin are suddenly back on the table, and last year's gadflies now seem as if they were ahead of the curve. Exhibit A: James K. Galbraith, go-to economist of Nation magazine-style liberalism, unabashed market skeptic, and rock-ribbed Keynesian since before Keynesianism was cool (again).
"Events have moved me to the center - I have not moved," says Galbraith, sipping coffee in his University of Texas office, which overlooks the presidential library of Lyndon B. Johnson, architect of the Great Society. It's December, and Galbraith has just returned from Washington, D.C., where he was one of five economists speaking in a closed-door session for House Democrats. In step with a former John McCain campaign advisor and a Clinton administration economist, he argued for a very, very big stimulus package.
"Every previous recession in my professional life has been a shock to a reasonably healthy system," says Galbraith, who is 57. "This is a general collapse of the core funding mechanism all across the country, and you don't know what the scale of the base case will be. The task is to come up with a large enough program to get ahead of this unknown tsunami coming our way."
So what do you call the $850 billion the Democrats asked for in January? For Galbraith, it's just a good start.
The name rings a bell, although probably a faint one if you're much under 40. Galbraith's father, the late economist John Kenneth Galbraith, was one of the most influential liberal intellectuals of his time. At the start of the World War II he was a top official at the Office of Price Administration, literally setting the price of a cup of coffee.
He was briefly an editor for this magazine, where, according to biographer Richard Parker, he played a crucial role in founder Henry Luce's efforts to popularize the ideas of economist John Maynard Keynes, a proponent of government intervention to maintain full employment. (Luce was a conservative, but not a very doctrinaire one.) The elder Galbraith later became an advisor to John F. Kennedy and then to Johnson, and was ambassador to India.
John Kenneth Galbraith was also a prolific writer. He actually coined the term "conventional wisdom" in his 1958 bestseller, The Affluent Society, a passionate argument for public spending that helped build the case for the Great Society programs. His 1955 history, The Great Crash: 1929, became a classic of market lore and cemented a popular view that capitalism just goes nuts from time to time.
Galbraith's reputation among economists is another matter: He barely has one, even though he taught economics at Harvard and served a year as president of the American Economic Association. Milton Friedman, the great free-market economist of the 20th century, told NPR that Galbraith was more of a sociologist than an economist. Even the liberal Paul Krugman wrote him off in 1994 as a "policy entrepreneur" not to be taken seriously for economics.
The sympathetic view is that at a time when economics was taking a mathematical turn, Galbraith stuck to writing in plain English, paying attention to the way real people in positions of power deviated from sterile models. "Galbraith insisted on taking the corporation as the central modern institution, not the market," says Parker.
Galbraith wrote about an economy dominated by unions and giant corporations like GM and IBM. Consumers and their choices hardly mattered - technocrats used scale and advertising to generate their own demand, and co-opted government to protect their markets. After the onslaught of Japanese imports in the 1980s and the technological disruption of the 1990s, that picture of the impregnable corporation was easy for critics to dismiss.
But this is a story about James Galbraith - why spill so much ink on his father? First, because Galbraith fils is proud to call himself, well, a Galbraithian. And it seems to be a very Galbraithian moment. In time, economists may settle on a neat model that explains the current chaos, and even identify some deft intervention that might have prevented it. Right now, though, the stories in the headlines are messy tales about corporations and people: lenders and mortgage brokers who stoked an artificial demand for housing, regulators who dropped the ball, and a speculative bubble reminiscent of the one described in The Great Crash: 1929.
"In the past four months The Great Crash has been the No. 1 bestseller on Amazon in both microeconomics and economic theory," says the son. "Wherever he is, my dad is laughing."
James Galbraith - his friends call him Jamie - completed his Yale doctorate in economics in 1981. "I probably started my career in economics thinking that the overlap between my father's career and mine would be relatively short," he says. In fact his father, who died in 2006 at 97, still had a shelf's worth more books in him. "After a while I just got used to the fact that his presence in my professional life was going to be a lot more prominent than initially imagined, and that there was simply ... no ... escape," he says, smiling and raising his eyebrows to punctuate those last words.
Galbraith came into economics via politics, working as a Democratic staffer on the Hill through grad school. In 1981 he became executive director of the Joint Economic Committee of Congress. The economy had been racked by stagflation, and a sort of consensus Keynesianism - the notion that the government could "fine-tune" a market economy with its taxing and spending decisions - had fallen into disrepute. The Keynesians "just didn't have a good theory of how to get out of inflation," recalls Bruce Bartlett, Galbraith's Republican opposite number on the JEC. There was a new conservative orthodoxy: Let the Federal Reserve keep inflation at bay with tight monetary policy, and otherwise get government out of the way.
In his 2008 book, The Predator State, Galbraith strikes a rather bitter chord about the time - "This was personal: The conservative alliance devalued my Keynesian education, obstructed my career, and deprived me and my few comrades on Capitol Hill of purchase on the levers of power." In conversation, however, he allows that he enjoyed those years immensely.
From his father and during his time as a Marshall Scholar at Cambridge University, Galbraith had imbibed a different brand of Keynesianism from the version that had just been swept away. It was a Keynesianism that emphasized capitalism's instability. Galbraith also held the view that high-employment policies need not spur inflation. Thus, he became a perfect sparring partner for the supply-siders and free-market monetarists. "They believed in their ideas and were willing to defend them," says Galbraith. "You could schedule an unending series of hearings and have these debates out in the open."
Bartlett, who later became a friend, recalls Galbraith's skill in debate. For one hearing on unemployment, Galbraith invited a group of jobless people to address the committee. One told the Congressmen that he had attempted suicide. "CBS radio ran that the whole day," Galbraith recalls.
Galbraith left Washington in 1985 and went to Austin, where he lives just off campus with his wife, Ying Tang, and their two children. Galbraith teaches in UT's public-policy school (named after L.B.J.), not in the economics department. He's first to admit that the mainstream of academic economics hasn't made much room for him. "For the most part, for people like me or people who work on financial instability ... all the doors [have been] closed," he says.
Unlike his father, Galbraith has done a fair amount of data-driven empirical work, largely on economic inequality. Outside academic journals he reaches a wider audience through liberal magazines like The Nation and Mother Jones, where he has a frequent column.
His book The Predator State is aimed at a similar readership, and it's a conscious effort to pick up the argument John Kenneth Galbraith left off. (The afterword notes that the father suggested the idea for the book in their final conversation, saying, "It will make you the leading economic voice of your generation.") It hit bookstores at an almost perfect moment last summer, just before the wheels came off the system.
Galbraith argues that "small government" conservatives never actually delivered free markets or fiscal restraint. In power, they grew deficits and didn't seriously attack public spending built up in the New Deal and Great Society. Rather, they've harnessed government for private gain. It's a clever attempt to defuse one of the most powerful arguments against government intervention - that picking winners and losers invites corruption and favoritism. Show that both parties have their own version of big government, and you can shift the debate to whose brand voters should prefer.
Republicans have an especially lousy brand right now, so the argument resonates. Free-market economists, of course, believe the moment will pass. "I don't think government will do a very good job getting us out of the crisis," says George Mason University economist Tyler Cowen. "Three years from now there will be a lot of handwringing and skepticism about why we have all this debt, and how taxes are going up, and did the stimulus really work."
During the presidential campaign, Galbraith was an informal advisor to the Obama team. This was largely a matter of sending e-mail memos, but it helped soothe progressives who worried that the rest of Obama's economic team was drawn from the centrist, Robert Rubin wing of the party.
And in the midst of the present crisis, Galbraith's voice reaches beyond the lefty netroots. Last September he played a small role in the Capitol Hill battle over the TARP bailout. On the eve of the failed House vote Galbraith, along with another prominent liberal economist, Dean Baker, and former FDIC chairman William Isaac, spoke before a group of 40 skeptical Democratic members in a basement room of the Capitol, laying out the flaws of the Paulson plan. (Galbraith, alone among that group, recommended voting for it anyway: "I didn't think Democrats should take responsibility for this bill going down.")
Galbraith was on the Hill thanks to an invitation from California Representative Adam Schiff, a fiscally conservative Blue Dog Democrat who had read a Galbraith op-ed in the Washington Post proposing an alternative plan. "I was concerned we were not getting a broad enough spectrum of opinion from economists," says Schiff, who voted against the first version of the bailout bill in part, he says, because of Galbraith's critique. Galbraith recommended raising the cap on federal deposit insurance and allowing the Treasury to buy preferred shares in banks; both ultimately happened. He also called for a bigger, more direct homeowner rescue and a massive increase in federal spending.
Even in today's climate Galbraith sits at the leftward edge of polite political conversation. He jokes that he is doing his best to make Larry Summers look like a moderate. Economists across the spectrum, from Krugman to former Reagan economic advisor Martin Feldstein, have blessed the idea of a fiscal stimulus. But Galbraith thinks it needs to be huge and should provide fast, direct aid to people in the form of higher Social Security payments and slashed payroll taxes.
For Galbraith, this is about more than a temporary stimulus. He thinks the crisis is proof that the economy needs the very visible hand of government to ensure long-term stability. And although he concedes that the pervasive wartime price controls administered by his father wouldn't make sense today, he sees lots of room for government to set wage standards (including caps on CEO pay) and to control prices in key sectors like energy and health care.
Put so baldly, it seems unlikely that this agenda would get much traction in Washington. Then again, the first steps toward nationalizing the banking system came under a Republican administration. Or look at the health-care debate. Almost every liberal reform proposal making the rounds attempts to tackle, in some way, the relentless rise in the cost of health care. Perhaps Galbraith's most urgent contribution is mainly rhetorical: the idea that it's okay to speak about "planning" again.
At what looks like a turning point in American economic history, the rhetoric matters. In the early 1980s, supply-siders like Jude Wanniski and Art Laffer may have had few allies in the ranks of academic economists, but through their popular writing and the Wall Street Journal editorial page, they convinced a generation that laissez faire was common sense.
One might expect Galbraith to bristle at the comparison, but he doesn't. He keeps an autographed copy of Wanniski's The Way the World Works on his bookshelf; the two men became friends in the years before Wanniski's death in 2005. "It's fun, 30 years later, to have some of the chance they did," he says.
Unless the markets pull off a miracle this year, the fun's just getting started.