The failure of economics in the runup to and aftermath of the Great Recession has generated a lively debate about how to reform economics and more specifically about the renewed relevance of Keynesian economics, which had fallen out of favor since the 1970s. The Keynesian message, so important in this latest round of political wrangling over the increase in the US debt ceiling, is that cutting government spending in a slump will only worsen the unemployment problem. The role of expansionary fiscal policy, according to Keynesianism 101, is to provide demand for goods (and thus for employees to produce those goods) when the main sources of demand in a capitalist economy — households and businesses – are not providing a level of demand necessary to generate a socially acceptable level of unemployment.

Keynesianism 102 is about the multiplier effect of changes in spending. This is the notion that an increase in demand (from any source, not just government but certainly including government) will impact employment and incomes with a ripple effect. This includes a direct impact and then a secondary impact when the direct incomes are then spent (in some fraction) and an additional fraction of that is spent, etc.

There are two corollaries to the lesson of Keynesianism 102 that are worth mentioning because they have been raised in the current policy debate. The first is about the differential multiplier effect of a spending increase compared to a tax cut. Empirical studies show that the multiplier effect of the former is greater than the multiplier effect of the latter. The second is about the differential multiplier effect depending on the income of the recipients. Since the poor are more likely to spend a higher percentage of additional disposable income than the rich, a tax cut that benefits low-income people will have a bigger multiplier effect than a tax cut that benefits the rich.

These lessons have not been integrated into current economic policy in the US, where deficit spending and progressive tax reform and expanded benefits for the poor and unemployed have been successfully resisted by the Republican congress. Nonetheless, they are well-established lessons of Keynesianism that most professional economists would accept.

The argument against Keynesianism 101 revolves around the psychology of investor confidence in the face of a rising fiscal deficit. The argument is that business people will reduce their investment spending when they see the government deficit becoming very large because it signals the likelihood of some detrimental future adjustment – either in interest rates, tax rates or government outlays – that will be detrimental for future profits. There is simply no empirical evidence to support this theory compared to Keynesianism 101.

But all this is sideshow in comparison to the lesson of Keynesianism 103.  The fundamental economic point of Keynes’s 1936 General Theory of Employment, Interest and Money was not about fiscal policy or the multiplier or income distribution.  It was about the fact that economic equilibrium (a stable condition from which no economic change would occur without external impetus of some sort) will not necessarily be characterized by full employment. Economists prior to (and some subsequent to) Keynes thought that free market economies would naturally adjust to full employment, as an excess supply of labor would lead to a lowering of wages and a corresponding increase in the amount of employment. Keynes explained that the natural state of a capitalist economy is “unemployment equilibrium,” and without a shock to aggregate demand conditions, there was no reason why the economy would not stay at this unemployment equilibrium. Keynes’s insight implied that the wage reduction strategy was not just theoretically wrong but, if implemented, would likely make the situation worse, since it involved a reduction in household buying power and thus would reduce business confidence.

A prospect as disastrous as the second “dip” that the American economy is about to experience is that of a long period of high unemployment that has no natural tendency to reverse itself. We should not stop our analysis at Keynesianism 101 and 102, since the great social problems facing America are understood best by Keynesianism 103.

So what is to be done? Paul Krugman has been a superb critic of the politicians’ focus on the deficit and the debt rather than on job creation. But he has been relatively quiet about what could be done if in fact the political winds were to shift. Robert Reich has been more explicit. His proposals for job creation include:

1. An additional cut in the payroll tax on employees and employers
2. An increase in infrastructure investment

My guess is that President Obama’s speech this evening will address these issues. If it does, it should be understood as not just a political maneuver, but as a serious attempt to tackle our economic problems.

Like many, I have serious reservations about elements of the debt deal. But from a standpoint concerned only with the legislative process, the debate in Washington has not been “business as usual.”  In recent months we have witnessed two primary, parallel attempts at compromise: The “Gang of 6” in the Senate, and the Obama-Boehner-Cantor talks at The White House. To me, the failure of the “Gang,” and the ultimate success of the White House talks, is a sign that our government is undergoing a significant shift in the way it legislates.

Change in the legislative paradigm is not a radical event – it has been the norm in our Congress’ history. Compromise, specifically over “perceived truths,” as Jeffrey Goldfarb notes, is the heart of the legislative process. Among the oldest approaches to compromise was John C. Calhoun’s “doctrine of the concurrent majority,” where the goal of legislation was to accommodate all ideas. During the “Golden Age,” Henry Clay championed the idea that “all legislation…is founded upon the principle of mutual concession.” Now, Obama’s inability to strike a “Grand Bargain” should not be seen as an unqualified failure; grand bargains can only be made within a legislative framework where both sides are willing to sacrifice equally, a point I will return to shortly.

Turning to the present day, we find two curious episodes in the Senate. First, we have an attempt by the Senate Republican leader Mitch McConnell to cede portions of the Senate’s power to the Democratic President. The Senate has always fiercely defended its own sovereignty with a ferocity that can only equal debates over world-shattering policy changes. William S. White, perhaps the most eminent scholar on Senate history, noted that it is “harder to change a [standing] rule than to vote to take a country to war.” For McConnell to suggest that the Democratic president takes the reigns is a clear act of desperation, a sign that the existing framework of compromise familiar to McConnell no longer applies.

Second, we have the “Gang of 6.” The Gang represents the driving force of contemporary compromise: bipartisanship. All too often, however, bipartisanship simply means party parity. Seven Democrats and seven Republicans negotiating becomes a ‘”compromise.” Nothing needs to be conceded by either party, and concessions need not be equal. The Gang of 6 at least attempted to include a spectrum of political opinion, including Southern conservatives like Saxby Chambliss and Northern liberals like Dick Durbin, whereas the “Gang of 14” was almost entirely composed of centrists from the Southwest and Midwest. But in an age of unprecedented partisanship, the gang model seems increasingly unsuited to its environment. The Gang of 6 proposed sweeping spending cuts and revenue increases: cut the deficit by $4 trillion in a decade, overhaul the tax code, and ensure the solvency of social security. The proposal provided significantly more spending cuts than revenue measures, but, even as Senate Republicans lined up in support, the House summarily dismissed it. The Gang did not receive the adulations that its predecessors enjoyed – it was derided by the Tea Party as the “Gang of 666.”

Contrast the effort of the Gang of 6 with the deal just reached. Substantively, there are similarities in the legislation and the Gang’s proposal. Where they differ, the latter tends to be more moderate. Both are worded so as to ensure both domestic non-discretionary spending and military budgets are cut, and both ensure deficit reductions in the trillions. In fact, the current deal presents a much more modest goal of $2.7 trillion in cuts. However, many large issues, including where the bulk of the cuts come from, have been deferred to a joint Congressional “supercommittee.” In very real ways, the substance of the deal will not be known until the supercommittee submits its legislation on December 23^rd.  But, at this early stage, it appears the White House deal achieved what the Gang could not.

When President Obama was elected, I had hoped that Washington might move past the ‘bipartisan’ era into a “nonpartisan” era. Democrats and Republicans would still fiercely compete to enact their agendas, but the legislative process would not be determined solely by party strength. The old cliché “be careful what you wish for” holds true. More often than not, we saw Cantor and his “Young Guns” undermining Boehner, Tea Partiers versus chamber deans, and the Senate versus the House. Obama played this advantage to the hilt and showed a shrewd control over the process of compromise that had eluded him during previous big-ticket debates. Gary Alan Fine correctly observed, for instance, missed opportunities in ARRA). Obama stayed firm to several core values. He was insistent on vetoing a short-term deal, and appalled at the idea of forcing students to pay interest on loans without deferral. Lo and behold, the final deal includes a long-term fix, if not the grand bargain he initially wished for, and an increase in Pell grants. In contrast, Republican negotiators drew a line in the sand in front of every issue; if everything is a core value, can one really stand for anything? Boehner and his colleagues succeeded in framing much of the debate, but it came at the cost of ceding their bargaining power to parties that were actually willing to solve the problem in good faith.

What this means for the future of the legislative process rests largely in the hands of the supercommittee. Composed of six members from each party, it still has significant differences with the “gang” model. It will force members of each chamber and faction to directly engage with each other. It gives a national platform where voices of reason and conciliation might be heard. This is only the second joint committee in history with the authority to write legislation. Its mere existence will change the landscape. As a couple of ABC News bloggers write, paraphrasing Benjamin Franklin, for now we only have “a deal – if they can keep it.”