American Keynesianism
Accounts of the development of Keynesian economics after the General Theory typically focus on the IS-LM model, sometimes called the Hicks-Hansen IS- LM model.27 This model provided a graphic representation of the interaction between the goods and money markets, which could be used to analyze the consequences of monetary and fiscal policy.
Central to the model is the relationship between national income or output and the rate of interest.1 However, most of the time, Samuelson and the network of economists with whom he was working argued not in terms of the IS-LM model (which shows the interaction of the markets for goods and money), but in terms of a simple multiplier model that ignored the money market and took no account of the effect of rising output on the rate of interest. Though economists eventuallyq. He spoke of the problem of maximizing employment while keeping the debt low as an isoperimetric problem, formulating this using integrals over time.
r. For example, if a rise in government spending causes output to rise, this will raise the demand for money, and hence the rate of interest; the rise in the rate of interest confined their use of this model to introductory textbooks, as something to be covered before students moved on to the more sophisticated IS-LM model, the discussions covered in chapters 18 to 20 show is that in the early 1940s the ideas expressed in this mathematically very simple model were far from straightforward. Economists had to grapple with conceptual issues about how the model in which income was determined by the interaction of saving and investment fitted in with the national accounts, the structure of which was still under discussion. Though the model was simple, the results often seemed paradoxical when viewed against an understanding derived from traditional theory.
Part of the reason for this emphasis on fiscal policy was the war.
The need for a dramatic increase in military production made inevitable a massive expansion in federal government expenditure—an enormous fiscal stimulus. Though it was important to prevent inflation, there was no question of allowing monetary policy, through interest rate increases, to interfere with this, for the nation's top priority was winning the war. Rising government spending could lead to rising output, rather than rising prices, because the United States, even when it entered the war, had still not recovered from the Great Depression and had large reserves of productive resources that could be brought into use. Fiscal policy and public finance became the big topical issues on which economists, privileged by not having to fight on the front line, felt obliged to work. This motivation meant that economists' discussions of Keynesian economics were dominated by practical concerns related to measurement and the implementation of policy. Though using theory, Samuelson and those with whom he was working were first and foremost applied economists for whom meticulous data analysis was more important than theoretical sophistication.Not only did government spending rise dramatically, so too did the deficit—the gap between federal spending and taxation.s This was generally accepted in wartime, even by conservatives, but there was fear about deficits carrying on into peacetime. Samuelson, like many of his colleagues, believed that the danger facing the United States after the war was a return to the conditions of the Great Depression, and in planning for peace, they began to articulate a view of fiscal policy as a tool that could be used to maintain
will partially choke off the rise in output, causing the multiplier effect of government spending to be lower than had the interest rate not risen.
s. In 1943, federal spending was $817 billion, or 42.5 percent of GDP. Revenues were a mere $250 billion, resulting in a deficit of $568 billion, or 29.6 percent of GDP (http:// federal-budget.insidegov.com/l/45/1943, accessed March 3, 2016).
The budget had almost been balanced in 1938.prosperity. This approach to policy can legitimately be called “American Keynesianism,” even though many of its proponents, including Samuelson, were cautious in their endorsement of Keynes, preferring to credit him with having made theoretical innovations that needed to be combined with other ideas. Where Keynes had focused on the need to raise investment, there was a stress on raising consumption, and where Keynes had sought to avoid advocating unbalanced budgets, it was argued that continuing budget deficits were not a problem. This incurred the wrath of conservatives, for whom balancing the peacetime budget was the hallmark of sound finance.
Working increasingly closely with Hansen, Samuelson was moving toward a position on economic policy that was politically controversial. Within the network of Washington economists, his positions were standard and he could debate technical details, but in the wider world he was enunciating views that were strongly attacked. In 1943, he had not yet ventured into the public arena, where Hansen was the main target of conservative attacks, but he was becoming known as a significant figure within the NRPB, a source of radical ideas on socioeconomic reform such as the proposal for a Bill of Economic Rights, and through his pamphlet he was identifying himself with Hansen. Two years later, Samuelson was to take the step from the world of academic and government economists into journalism, but before that he was to become closely involved with a different world—that of physicists working in MIT's Radiation Laboratory. And on top of all of these activities, Samuelson was preparing his thesis for publication.