What Would Keynes Do? | The Nation


What Would Keynes Do?

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The whopping trade deficit should be the dream issue for Democrats: “We’re the party that will really get the country out of debt.” That’s how we connect with the voters: show the connection between the private and public debt and the external debt. The GOP has nothing to say on this. We have the whole issue to ourselves.

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Thomas Geoghegan
Thomas Geoghegan is a labor lawyer and author. His most recent book is Were You Born on the Wrong Continent? How the...

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So what would Keynes do?

Here’s what he would not do:

“Vote down free trade treaties.” Though he blasted free trade, Keynes thought tariffs were ridiculous. While knocking free trade, he also wrote that “the reader must not reach a premature conclusion as to the practical policy to which our argument leads up…. The advantages of the international division of labor are real and substantial, even though the classical school greatly overstressed them…. A policy of trade restrictions is a treacherous instrument.”

“Devalue.” He acknowledges sometimes it can work to make the country’s goods cheaper abroad. But we now live in a world of fluctuating and not fixed exchange rates. In Keynesian theory, no one is going to make a long-term decision to invest based on a day-to-day fluctuation in the dollar. The dollar has dropped a lot at different times, against the euro as well as the renminbi, and it has never put a big dent in any serious way in the trade deficit. Other countries will compete as hard as we do to devalue, so it will never work.

“Let’s spend on infrastructure.” I’m all for it. But even if we pave the interstates with gold, it won’t help us sell more goods abroad.

So what’s Keynes’s answer? It’s simple. While he believed in public works, to say the least—he practically invented the concept—he never presented the public sector as the real key to the economic problem. Rather, as he writes in The General Theory, “The weakness of the inducement to invest has been at all times the key to the economic problem.”

We have to get the rich to invest. Specifically, we have to get the rich to invest “by employing labor on the construction of durable assets.” We don’t have to get the rich to consume. They will gag. And we don’t really have to get the rich to work. Who cares if they work? They can stay at home in bed in silken sheets.

The real point is to get them to invest—not save, not speculate in financial instruments, but invest in widgets we can wrap and ship and sell abroad. And Keynes would put that question to the left, to us: How can we get the rich to invest?

Well, in The General Theory he has one big idea—lower the rate of interest. By cutting the rate of interest on loans we can prod the rich to put their money into less liquid investments, in the kinds of things we can sell abroad.

I know: everyone will say, “Keynes is nuts. The Fed has zero rates. It’s like Japan. ‘We’re pressing on a string.’”

But it’s not. Sure, the Fed has zero rates, and mortgage rates are low. But even after Dodd-Frank, look at the colossal returns to the financial sector—i.e., to commercial and investment banks. For Keynes the key to getting the rich to invest in labor on the construction of durable assets was to hold down the windfall returns from loans, buyouts and financial speculation—the income he would call “interest.” That’s the nub of our country’s trade deficit problem. In Book VI, Keynes adumbrates the one big thing he learned from the Bourbons, the Habsburgs, John Locke and even Adam Smith about the importance of holding down the rate of interest to stimulate trade, to make it less attractive to “invest” in short-term derivatives and relatively more attractive to invest for the long term in widgets. Keynes put it this way: “It is impossible to study the notions to which the mercantilists were led by their actual experiences, without perceiving that there has been a chronic tendency throughout human history for the propensity to save to be stronger than the inducement to invest.”

Everything in the United States is set up to encourage the rich to put money into financial instruments rather than long-term investments. What would Keynes do? Get the rich to think outside the Wall Street banking box. Get them to put money into the part of Main Street that used to trade abroad. How do we do that? For starters, put in usury laws—limits on interest rates. In a general way, cut down the appeal of being a creditor and not an investor.

Keynes quotes Locke on this point: “High Interest decays Trade. The advantage from Interest is greater than the profit from Trade.” And by trade, Locke does not mean day trading.

Now, as Richard Posner recently wrote, part of the problem with understanding Keynes is the vocabulary. So, for example, it is puzzling to us to hear that the rich don’t make enough “investments.” Don’t they invest like crazy? They invest in stocks, bonds, financial instruments, all sorts of things we would never call loans. But to Keynes these “investments” are loans. They’re liquid. They often have a fixed rate of interest. Corporate takeovers on Wall Street may look like “investments,” but if you get up close, many are just loans—i.e., transactions in corporate debt. Keynes could pick up the Wall Street Journal and give the real name for one “investment” after another: loan, loan, loan.

Strip away the pretense of investment, and too many a financial instrument is either a loan or just the inflated price of a paper asset. When Keynes talks about the importance of usury laws, he means laws limiting interest rates but also laws and regulations that hold down profits on financial instruments.

Keynes would point out that the rise in the US trade deficit—which became serious in the 1980s—coincided exactly with the astonishing deregulation of the financial sector. We knocked down usury laws. We allowed the first end runs around the Glass-Steagall laws.

Wait—that’s our problem? Not China or the world economy? Well, it’s hard to channel Keynes now, but look at the back page of The Economist. Not just Germany but a lot of other high-wage countries are doing well in the global economy. It’s hard to account for the difference with labor cost alone.

Readers who took Economics 101 (or Economics 1001, as it later became as a result of inflation) may remember something about a “liquidity preference.” That means keeping money “liquid.” For Keynes the first duty of the state is to ensure that the “liquidity preference” is low, to prod people not to keep their money liquid but to lock it up in a long-term investment where it will not be so easy to get.

To some, this all sounds very nice for the future, but right now we need to get people out there to repave the interstates. Fine, let’s get back to work: but as long as the trade deficit keeps on draining us of wealth, the middle class will keep on going down the drain.

In the end there is one way out of this economic mess—Keynes would say we have to shock, push, lure and sweet-talk the rich in this country to part with their money and start enterprises that get us out of debt. But how are we going to do that? We can’t even get employers sitting on hoards of cash to hire a few extra workers.

* * *

So what would Keynes do? Well, I don’t know: he’s dead, as we all are in the long run. But I have a hunch what he would do. As the solon or lawgiver of modern social democracy, Keynes would look at the most successful social democracy in the world right now. What do the Germans, with their hefty trade surplus, do?

First, they have a whole different type of corporation—with workers making up half the directors on the board. And workers have privileged positions in the firms, real power and responsibility. It doesn’t guarantee that corporations invest, but it’s a big help to have workers in director chairs sitting in the boardrooms.

In addition, the Germans have government-sponsored banks, like the Sparkassen, that lend to businesses. We have the Federal Reserve printing money like crazy, but the banks sit on it and don’t lend it out, just as American CEOs who have never met a worker except on reality TV sit on their money and don’t hire.

We can’t adopt these things wholesale, but we can take baby steps, as I wrote in a Nation article last year [see “Ten Things Dems Could Do to Win,” Sept. 27, 2010]. But the Keynes of Book VI would also be interested in anything beyond Dodd-Frank that discourages financial speculation and loans. He’d be in favor of denying tax breaks for leveraged buyouts that leave companies in debt. I think he’d love the idea of a financial transactions tax, which Dean Baker has proposed here and the Europeans are considering.

The one standard way of being competitive abroad is to cut wages here—to improve the terms of trade. Keynes hated the idea of cutting wages. It was the standard remedy of classical theory, and he loved to point out that cutting demand at home might only prolong a slump. But suppose the government could dramatically cut nonwage labor costs by assuming the cost of health insurance? If our government could deliver just one Keynesian “shock” to make us more competitive, it would be single payer national healthcare. At least right now, we should expand Medicare coverage (lower the eligibility age) and adopt a public option, so that the government can have more bargaining leverage to beat down by decree the stupefying prices we pay to get well in an ever more concentrated healthcare sector.

It is horrifying to see even the “tough” new President Obama proposing to shrink Medicare—aside from leaving people uncovered, shrinking coverage means shrinking the government’s power to dictate the price and leaves employers and the rest of us exposed to higher healthcare costs. If the president wanted to increase the trade deficit, the best thing he could do would be to cut Medicare coverage and give the government even less power to hold down the healthcare costs that make us even less competitive abroad than we are now.

Finally, I think Keynes would hold up on the small stuff—i.e., the cuts in the payroll tax or the proffer of one more investment tax credit—for none of that will matter (if it ever matters) until we get people out of loans. In one way or another, in keeping with the ancient wisdom of the Bourbons and the Habsburgs divined by Keynes, we have to take down the scaffolding of this creditor-debtor economy in which our country is imprisoned.

Now more than ever: it’s a great time to be a Keynesian. Remember to vote for Keynes in 2012.

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