What Would Keynes Do?
After the Obama stimulus seemed to fail, a Washington Post headline gibed: John Maynard Keynes, the GOP’s Latest Whipping Boy. On the left, of course, he’s still our guy, even if, like some “Keynesians,” we have never read a word of Keynes. Some pundits say that in the 2012 presidential election, the real candidates will be Keynes and Friedrich Hayek, the Austrian economist who raged against all forms of state planning (though Hayek liked national health insurance). If that’s the real presidential election, wouldn’t it behoove some of us true believers to ask, in this moment of double-dip despair, “My God, what would Keynes do?”
If we consult his writing, the scripture left by Keynes himself, we might be surprised to find that it would be a lot more than “prime the pump”—i.e., just run up the federal debt. For Keynes, the problem would be not just getting people into stores, or even getting employers to hire but getting our plutocracy to invest. It’s not just our jobless rate but our huge trade deficit that would appall him. He’d be aghast to see the United States bogged down in so much debt to the rest of the world.
I know: that’s not what people think. “Wait, wasn’t Keynes the one trying to get us into debt?” Yes, but not that kind of debt—in fact, as his biographer writes, Keynes personally hated debt. Especially in a recession, he hated to see a country with a trade debt, or trade deficit, which arises when a country’s imports exceed exports. Indeed, when the trade deficit is as jaw-dropping as the US trade deficit is now, it is harder to use Keynesian deficit spending to push employment back up. Keynes, unlike some of his disciples today, was quick to see this problem.
In 1936, when Keynes wrote his classic—The General Theory of Employment, Interest and Money—he was emphatic on this point: no country, ever, should run up any kind of trade deficit, much less the trade deficit on steroids we are running. Of course, in 1936 and for years after, the United States was the biggest creditor country in the history of the world. So Keynes never worried about our being a debtor country—rather, he spent much of his last days begging the United States to get other countries out of debt. If he came back and saw the colossal external debt we run now, he would be pushing for a serious plan to bring it down just as hard as he’d be pushing a stimulus for full employment.
I admit, Nation readers, that standing in line at Whole Foods, I occasionally pick up The Economist, if only to go to the back page and see the merchandise trade deficit the United States and other countries have been running in the past twelve months. It’s scary: $680.9 billion as of July 9. That puts us near $0.7 trillion in the red. But in the chart, much of the world is in the black. OK, the two US wannabes, Britain and Spain, have trade deficit disasters. And some have too much. “Low-wage” China has a surplus of $172.5 billion. “High-wage” Germany beats out China, with a surplus of $188.4 billion. But when I run my finger up this chart to the US deficit, it’s a shock. It’s as if I’m pressing on the sucking chest wound in the world economy.
Keynes would rattle that ripped-out page in front of us.
Actually, the trade deficit might be worse if there was full employment, our supposed goal, since we would have the money to buy even more hardware from abroad as we bite into more sandwiches at Jimmy John’s.
And that is just the surface trade deficit. Underneath that, there is a still bigger deficit, with US corporations outsourcing so many jobs. Here is a headline from the Wall Street Journal on April 19: Big US Firms Shift Hiring Abroad. During the 2000s, the Journal reports, while US multinationals have fired 2.9 million workers here, they have hired 2.4 million abroad. Some of these workers make parts to be shipped here, but when the parts are assembled into the gizmos or widgets that we sell abroad, we count them as “exports.” “Isn’t that true for other countries?” Sure—but the United States is much worse, because there is no government check (as in China) or organized labor check (as in Germany) to keep employment here. Our real trade deficit is much worse than the one on the back page of The Economist.
That’s what Keynes, spluttering, would be the first to point out. Indeed, he spent most of his life trying to get debtor countries out of debt. After World War I, he tried to get Germany out of debt. Read his famous 1919 essay “The Economic Consequences of the Peace.” By the 1930s Keynes had notoriously turned against free trade and was giving lectures on the need for “national self-sufficiency.” He concludes The General Theory with a long polemic against free trade and a paean to what the Bourbons and the Habsburgs used to do: knight any merchant prince who brought back a ducat from abroad. The one big (and smart) idea of absolute monarchy was to push exports over imports.
It’s all in the last part of The General Theory—which the wonderful Paul Krugman describes as “a kind of dessert course.” But Keynes’s attack on external debt comes as a crescendo to his whole argument. And he died trying to set up a system that would keep debtor countries out of debt. He pushed for the World Bank and the IMF. He even fought for a global currency: the bancor. In the last volume of Robert Skidelsky’s great biography, John Maynard Keynes: Fighting for Freedom, 1937–1946, there’s poor Keynes getting off his deathbed in 1944 and trying to set up a global system that would push creditor countries like the United States to pull debtor countries out of debt.
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Of course no country should run a trade deficit. That’s common sense. Maybe the economists whose courses Bush and Obama probably took at Yale or Harvard think it does not matter. But for Keynes, a trade surplus was a “stimulus,” and a deficit was a disaster. In Book VI, he states emphatically: “A favorable balance, provided it is not too large, will prove extremely stimulating; whilst an unfavorable balance may soon produce a state of persistent depression.” OK, I supplied the emphasis. But Keynes was amazed at the indifference of most economists to the problem. “The extraordinary achievement of the classical theory was to overcome the beliefs of the ‘natural man’ and, at the same time, to be wrong,” he wrote.
On a 1930s gold standard, a trade deficit was bad in part because we paid it out in gold. But it’s just as bad to pay for it year after year by giving up our industrial might—by melting down America, Inc.
Keynes believed that practical leaders would always see the supreme importance of keeping the country out of external debt—indeed, he seemed to see this as the first duty of the state. For Keynes, in his later years, it was the economic analogue to defending one’s country. Avoiding an external debt was an act of patriotism and national self-preservation in a sense that even reducing unemployment was not. It’s “fighting for freedom,” in Skidelsky’s phrase. Keynes would not believe how Obama, the Tea Party, the Democrats, the Republicans—our leaders—pay so little attention to our whopping trade deficit, as if it had nothing at all to do with our slump.
The right, the Tea Party, the Concord Coalition, Mr. Bowles and Mr. Simpson, Peter Peterson—they want to bring down the federal deficit. The left, our side, generally wants to go deeper into debt and get to full employment. Then we’ll bring down the federal deficit. Then we’ll have full employment and all will be well.
But until we bring down the trade deficit and fix our balance of payments, there is no way out of debt.
Some readers will raise their hands: What’s the difference between the trade deficit and the balance-of-payments deficit? Well, over a year, the balance-of-payments deficit is an accounting statement—it’s the difference between all the payments to foreign nations and the receipts we get from foreign nations. It’s not the same as the trade deficit because it also counts up our foreign investments and investments by foreigners, loans, tourism, foreign aid. But we have a big balance-of-payments deficit because of our trade deficit—that’s what explains it, since we hold our own in the nontrade transfers.
We should put the accent on the first word in “balance of payments” because an accounting statement has to balance. As long as there is a balance-of-payments deficit, someone in the United States has to go into debt. Under Bush it was mostly the private sector: you and I. We ran up our Visas and MasterCards. We took out subprime loans. We did our home equity financing. Now we in the private sector are cutting back. So if you and I aren’t going into debt, Uncle Obama has to go into debt.
Let’s suppose we on the left do run up a debt, get back to full employment (ha!) or not-so-bad unemployment, and then bring the federal deficit down to zero.
Is all well?
No, because now you and I in the private sector have to go into debt. It’s simple arithmetic. Somebody in this country is going to have to go into debt to make the balance-of-payments balance. Who’s going to do it? It’s the government or us. One day Uncle Obama or his successor will say, “I’m done going into debt to make the balance ‘balance.’ It’s your turn to go into debt to make the balance ‘balance.’”
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