Here are three replies to Thomas Geoghegan’s essay, "What Would Keynes Do?" A second installment of this forum will be posted tomorrow.
WWKD: ‘Somewhat Comprehensive Socialization’
Before I say what I didn’t like about Thomas Geoghegan’s essay on Keynes, I want to applaud something I really like about it: his dismissal of protectionism. That’s rare on the left, especially the labor left. You often see analyses coming from our side that compute job losses from trade—basically by dividing trade deficits by country by the average US wage—while allowing no offsetting gains from trade.
To steal Keynes’s word, any protectionist moves by the United States now would be “treacherous”—they could drive the world into deep recession. Obviously the US trade deficit is unsustainable, but our voracious demand for imports has been a great support for the global economy. Taking that away suddenly would be disastrous. Something’s got to give, but that’s a project for the long term.
But I fervently disagree with the emphasis Geoghegan places on keeping interest rates low. As any Keynesian could tell you, in a depression, even a zero rate of interest cannot overcome fear. In an economy as rocky as this, investors prefer US Treasury paper—which has continued to trade at ever-lower interest rates since the S&P downgrade—to riskier bets. (Prospects in private markets can’t be great if investors are willing to lend a supposedly busted Washington money for ten years at a rate well under 2 percent.) That is precisely why the government has to do some investing: no one else is.
As Keynes said, “For my own part I am now somewhat sceptical of the success of a merely monetary policy directed towards influencing the rate of interest. I expect to see the State…taking an ever greater responsibility for directly organising investment.” He was always coy about exactly what he meant by this, or his statement later in the General Theory embracing “the somewhat comprehensive socialization of investment.” Bringing Keynes back means talking about that sort of thing, with some more precision.
Joan Robinson said that it was a pity that Keynes talked so much about investment without talking about what investment should be for. She has a point. The burying bottles only to dig them up example may be reductio ad absurdum, but it’s still revealing.
The investments that the private market is not making are those necessary to deal with climate change. Clean energy, fast trains, all that wonky stuff like smart grids and retrofitting isn’t the kind of thing that gets the heart racing, but it all has enormous potential to generate not only domestic economic growth in both the short and the longer term but also to keep earth reasonably habitable.
Keynes wrote a famous essay on how economic growth would eventually lead to a life so materially abundant that our grandchildren maybe could give up on all the money-making and become civilized epicureans. Today we have to wonder if they’ll have a non-miserable place to live. If we want to revive something of Keynes’s hope for the generation after the next, we need at least a somewhat comprehensive socialization of investment.
WWKD: A Good Stimulus
That reducing the trade deficit would be one of the most promising possible routes to increasing America’s economic output is something I don’t doubt. But the problem with trade surpluses as a solution to a global economic downturn is that, mathematically speaking, not everyone can have one. The aggregate trade flows of the world as a whole need to add up to zero. The European Union’s theory of the crisis is precisely along these lines—Ireland, Spain, Greece, Portugal and Italy need to boost their net exports. At the same time Germany has no intention of reducing its own trade surplus. Nor does Japan or China. For world trade flows to rebalance, something will have to give.
And some day it will. It’s simply not possible for trade deficits the scale of America’s to persist forever. The US healthcare system isn’t going to be restructured overnight. Nor will the extraordinary oil intensity of the American economy vanish tomorrow. Over the long term, working on these issues is critical. But as Keynes wrote, in the long run we’ll all be dead.
With 9 percent of the workforce sitting at home, idle and depressed while employed workers suffer from reduced hours and falling incomes, it’s critical to do what we can now. Under the circumstances, the value of a good stimulus should not be overlooked. The Federal Reserve, acting in concert with the Congress, can and should create money and put it into the hands of middle class people and cash-strapped state and local governments. More money will mean more spending will mean more production and less unemployment. It’s true that some of this spending will leak abroad to Asian manufacturers and oil producers, but one shouldn’t overstate this. The trade deficit is 5 percent of GDP, not nothing, but still consistent with the idea that 95 percent of whatever we do will, on net, stay at home.
WWKD: He Wouldn’t Use Debt As an Excuse
James K. Galbraith
Tom Geoghegan is such an important defender of workers that I hesitate to play the pedant here. But when he read Chapter 23 of Keynes’s General Theory, he didn’t quite get out of it what Keynes put in.
The chapter is called “Notes on Mercantilism,” and it sets out what Keynes calls “the element of scientific truth” in that eighteenth-century doctrine. In a world with little public spending and no central banks—the world of the classical gold standard—a trade surplus was the one sure way to stimulate demand and lower interest rates, thus to raise domestic profits and secure high employment. As the mercantilists understood, this was a big advantage in a dog-eat-dog world. England became rich through industrial exports, while despite her vast American treasures Spain was destroyed by indolent consumption. And this is roughly the message Geoghegan would now adapt, more or less, to the United States and China.
But we live today in a Keynesian world. Both countries separately control their interest rates (a trick made possible by Chinese capital controls). Both set their own levels of public spending. And so, each can pursue full employment if it chooses. Neither country needs a trade surplus—or trade balance either—and contrary to widely held impressions, China’s surplus with the whole world, as opposed to its bilateral balance with the United States, was quite small until after it joined the WTO in 2002.
World monetary arrangements meanwhile are actually post-Keynesian and have been since Keynes’s own Bretton Woods system was destroyed by Richard Nixon in 1971. We’ve since evolved a world dollar standard, under which the greenback is not the strongest currency (because it is rarely scarce) but always the safest, thanks to the vast and liquid market in US Treasury bonds and bills. Dreams of replacing this arrangement with something more balanced and fair surface occasionally but are easily frustrated. We are the new Spain, perhaps—but our version of the Potosí silver mountain is located at the Federal Reserve on Constitution Avenue in Washington, DC, and the ore will never run out.
It follows that our international “debt” is nothing more than a line on a spreadsheet, to which we pay interest by nothing more strenuous than running a computer program. Holding that debt conveys no material benefit to the Chinese, who already import every airplane, bale of wheat or barrel of oil they happen to need at any given time. Owing it is not a burden on us; no work goes into paying the bills as they come due. And therefore our foreign debt is no excuse for failure to act against joblessness, homelessness, urban decay, energy insecurity and climate change— among the other, really existing problems that afflict us here and now.
One other thing: Keynes didn’t splutter.