What Would Keynes Do?
Personally, I’d prefer that the government go into debt. As a taxpayer I’d rather pay the current low rate on US Treasuries than have to pay 25 percent to 30 percent on my Visa. The Tea Party and the GOP keep saying we can’t saddle our grandchildren with all this debt. Actually, we might be doing them a favor to saddle them with public sector instead of private sector debt. At least with public sector debt, none of our grandchildren will be hauled into court and sued.
What is the right thinking? But the left has no real plan to get out of this mess either.
Of course, others (even in the pages of this magazine) have pointed out that the US external trade debt is a bad thing, though it gets very little mention in our political debate. But it has a whopping big role in the current global crisis. The world filled up with foreigners holding dollars. They put the money back into the US economy in the form of loans—Treasury bonds, to be sure, but also corporate bonds, financial instruments, prime loans, subprime loans, payday loans and all manner of corporate debt. And the bloating of the financial sector—unregulated—led to the collapse.
But what’s behind it all is the fact that the United States cannot pay its way in the world. And while a smaller country would have expired long ago, we keep stumbling along, getting sicker, losing industrial weight, because the rest of the world has an interest in continuing to hold us upright.
For Keynes that would be the challenge—not just to bring down but to eliminate it: the whole thing. The failure to do so has real implications for other parts of Keynes’s theory. The answer to our crisis is not to “hire and rewire,” or to have a lot of public works. Let me add, by the way: I’m a labor lawyer; I want the government to spend. I love public works. I’d love a new O’Hare Airport. I’d love a repaving of Lake Shore Drive. And certainly Keynes loved public works. He saw people starving; he had a heart. We have to do something. We can’t wait for the trade deficit to come down. But that’s not the answer—it’s urgent, to be sure, but it’s just a first step. The answer is to get rich people to put their money into real “investments” and not “loans.” It’s to induce the rich in this country to invest “by employing labor on the construction of durable assets.” Call them widgets; call them iPads. Call them anything we can wrap, ship and sell to somebody abroad.
“Oh, but he wouldn’t put that ahead of the stimulus.”
No—but he’d put them together.
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For a while in 2009 it seemed everyone was a Keynesian. Skidelsky even rushed out a book, Keynes: The Return of the Master. Just after Obama took office, my colleague Mike was on the El and had his Financial Times, like everyone else in our office. A commuter spotted him and said, “Isn’t this a great time to be a Keynesian?” But now we’re not so sure. Even on the left some might ask: Was Keynes right about all of that, or should we look elsewhere for a prophet? Of course Keynes was right! His General Theory may not be quite as verifiable as Einstein’s. There is no Mariana Islands where we can set up our instruments and observe an eclipse. But we can look at other countries, like Britain and Spain, that have chosen austerity. They’re basket cases, just as Keynesian theory would predict. And East Asian countries that used Keynesian principles to stimulate their economies bounced back. Germany is an exception, but it has an enormous stimulus coming from its trade surplus—much of it from East Asian and BRIC country demand. With our not-quite-big-enough stimulus, the United States came out in the middle—the economy is not in deep freeze, as in Britain or Spain, but neither is it hot.
Part of the reason the United States isn’t doing better is that, thanks to the trade deficit, Keynesianism has lost its punch. On the evidence of The General Theory Keynes would argue that a stimulus has to be bigger, or work harder, as long as we have this external debt. Consider a twist on Keynes’s famous Aesop-like fable about the Bank of England. Let’s drop the Bank of England and make it all about the Federal Reserve. As Keynes would put it, rather than do nothing in a slump, it would be better for the Fed to bury bank notes in bottles and pay Americans to dig them up. Not only do we goose employment but there is a multiplier effect.
But Keynes did not say we should put bank notes in bottles and bury them in China and have Chinese workers dig them up. Why not? Well, it doesn’t do us any good. It does not employ any US workers. And of course, there would be no “multiplier.” The beauty of the stimulus is the “multiplier” effect. OK, I will oversimplify: if we hire Americans to dig up the bottles with bank notes, they have cash to spend. In 1936 they might go to spend it at the corner bar. The bar hires more wait staff. They go out and buy more groceries. Someone buys an extra truck and truck driver to bring the fructose syrup in from Iowa for our Froot Loops, and… should I stop?
It just goes on and on… jobs, jobs, jobs, multiplying to the Pythagorean heights.
But it’s not 1936. It’s 2011. Now after digging up the bottles, Americans will go to Target and Walmart and spend on bags of kitty litter made by child labor in China. And what’s going to happen to the multiplier when the Obama bucks we spend end up over there? In Chapter 10 of The General Theory Keynes writes, “In an open system with foreign trade relations some part of the multiplier…will accrue to the benefit of employment in foreign countries.” Or, as he said, there will be a bit of “leakage.” But that’s OK if they buy back from us. If there is a balance of trade, it’s OK. But they aren’t buying back from us. They are buying more from Japan and Germany, so our stimulus goes out of China and over to those countries.
It’s bad enough that we’re transferring all that wealth even in a good time. But when we’re counting on a stimulus, we’re leaking on a scale Keynes could hardly even imagine, and even in 1936 he already worried enough.
Given the leakage of the multiplier, the stimulus has to be huge. Let’s be honest—it freaked out independents, and even our base, to see how deep in debt Obama initially tried to go. So when a seemingly huge stimulus did not deliver, the country soured on it. “They don’t understand Keynes.” But maybe we don’t understand Keynes. Is the public so irrational? As we run up an annual public deficit of $1.3 trillion, our jobless rate is a stunning 9 percent, and the real rate is much higher. Thanks to the Tea Party, alas, we know too well that the government borrows 40 cents for every dollar it spends.
There are other reasons Keynesianism has lost its punch.
First, by making their own cutbacks, our state governments can nullify the federal stimulus. In 1936 the states were just toy governments. The New Dealers hated them. But now they are far bigger public sector employers than Washington. By virtue of state constitutions requiring balanced budgets, they have to cut when Keynesian theory would have them spend. If the stimulus did not stimulate, we can partly blame our fifty Tea Party constitutions, which require a foolish “austerity” in the states. In our system of federalism, a Keynesian-type stimulus is half unconstitutional.
Second, the rich are so much richer now than they were in our Keynesian golden age (let’s say 1940 to 1975). If Obama gets GDP growth up by 1 percent, most of that goes to the superrich. It’s beyond their capacity to consume it—i.e., to unleash a multiplier effect. The Financial Times has a regular supplement called “How to Spend It,” but it’s beyond their human strength. There’s too much to spend.
A stimulus can wake up an egalitarian country’s economy, since everyone is spending. But a stimulus cannot wake up the economy of a super-plutocracy: the people at the very top just roll over in bed.
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