Posts Tagged ‘John Maynard Keynes’

The irrelevance of old-time Keynesianism

May 12, 2020

John Maynard Keynes was one of the great economists of the 20th century,  Maybe he was the greatest.  He is the father of the idea of economic stimulus.

His insight was that, in a capitalist free-enterprise economy, economic growth depends on a growing mass consumer market, which depends on masses of the public having money in their pockets.

So when the economy stalls and people are out of work, the best way to stimulate the economy is to give the people more purchasing power.

J.M. Keynes

Once they started buying things, businesses would hire more people, and there would be a multiplier effect that spread through the entire economy.

The important thing, according to Keynes, was to get people back to work and earning money—no matter how.  He famously said that hiring workers to dig holes and fill them up again would be better than nothing.

In the pandemic lockdown, governments are doing exactly the opposite of what Keynes recommended.  The government is actively trying to prevent millions of Americans from going to work.  By staying at home, they help limit the spread of the virus.

Congress recently voted an economic bailout that was called a “stimulus” bill.   But economic stimulus was not, and is not, needed.  What is needed is an economic sedative, combined with an economic life support system.

We do not need employment for the sake of employment.  We need to have virtually necessary jobs get done, less necessary jobs put on hold and useless jobs not to be done at all.  We Americans as a nation have not yet figured out how to do this.

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What worked and what didn’t

July 17, 2014

Human nature vs. Keynesian economics

July 19, 2011

The trouble with Keynesian economics is that it asks too much of human nature.

The late great British economist John Maynard Keynes said it was possible for governments to smooth out the business cycle of boom and bust by doing what Joseph and Pharaoh in the Bible did—to store up surpluses in the good years, and draw them down in the bad years.

Click to enlarge

Human nature is just the opposite.  Human nature is to spend money when you have it, and to cut back when you don’t have it.  This is pretty much the history of U.S. government policy during the past 10 years.  During a period of economic growth, the George W. Bush administration added to the government’s debt by cutting upper-bracket taxes, by starting two major wars and by adding a new mandate to Medicare.   Barack Obama took office in the middle of a recession with a government already deeply in debt.   Whatever you think of the President’s decisions and priorities (and I think they are mostly wrong), he  is in a situation where he has few good options.

John Maynard Keynes was not an advocate of big spending or high taxes.  He said that, in times of recession, the government should either increase spending or cut taxes—either one would do.   President John F. Kennedy, for example, promoted a temporary business investment tax credit in order to counter a business downturn during his administration.  But the best way to fight recession, according to Keynes, would be programs or tax cuts that helped low-income and middle-income families because those families would be most likely spend money and stimulate business activity.

But whether government increased spending or decreased taxes, the increase or decrease should be temporary, Keynes said.  As economic activity picked up, spending and taxes should revert to normal.  This is where his ideas are contrary to human nature.  As soon as you start a new government program or lower taxes, you create a constituency to keep the program and the tax break through good times as bad.

Historically the Federal Reserve System, because it is somewhat (not completely) buffered from political influence, has been able to implement Keynesian economics better than the President and Congress have.  The Fed has used its powers to influence interest rates to stimulate borrowing when times are bad, and to throttle down on credit when times are good.  As a former chairman once said, the Fed’s job is to take away the punch bowl when the party starts getting good.  Unfortunately, under the leadership of Alan Greenspan, the Fed’s policy was just the opposite.  During the stock market and housing bubbles, the Fed spiked the punch bowl instead of taking it away.

Another way to protect Keynesian policy from human nature is to put policies in place that automatically respond to changes in the economy.  One example is unemployment compensation.  In good times, workers and employers normally pay more into the compensation fund than they take out; in bad times, the fund pays out more than it takes in.  It would be possible to increase the effect by having payroll taxes automatically go up when a state’s unemployment rate goes down, or to increase the period of eligibility for unemployment when the unemployment rate goes up.

I think the ideas of Keynes were good as far as they went.  I think the United States is in a situation in which a Keynesian stimulus is not enough.  The U.S. government is already deeply in debt, and we Americans individually are deeply in debt.  We need to rebuild our productive capacity, not just jump-start the economy, and this requires more than temporary measures.  That in many ways is a more difficult challenge than faced President Franklin Roosevelt during the Great Depression.

Keynesian medicine for a sick economy

July 27, 2010

John Maynard Keynes was a very smart man.  Bertrand Russell, who was no dummy himself, said that whenever he argued with Keynes, he felt he was taking his life in his hands and generally emerged feeling like a fool.

John Maynard Keynes

Prior to Keynes, the accepted thinking among economists was that the working of the free market always brings things into balance, and the best cure for recessions is to leave things alone and allow the balance to restore itself.  What Keynes noticed that his predecessors didn’t was that the economy could come into balance at a high level of unemployment and low level of economic activity, and stay there for a very long time.

A economic crash creates a domino effect.  When people lose their jobs, they stop spending money, which means that business is bad, which means that more people lose their jobs.  Bank failures beget bankruptcies, and bankruptcies beget bank failures.  Recovery can be slow, because businesses aren’t going to hire people unless there are potential customers.

Keynes thought governments could help speed up recovery by putting people to work on public projects, by cutting taxes, by running temporary budget deficits to put money into circulation, and by trying to push down interest rates so people could more easily borrow to buy things and businesses could more easily borrow to expand.  He thought government to stop the cascading effect of depression by creating social safety nets, such as unemployment insurance and deposit insurance.

The second part of his philosophy was that when times were good, governments should pay down their debt and try to keep inflation under control.

His ideas came to be accepted wisdom during the 30 or so years following his death in 1946, and recessions during that period were milder than in the pre-Keynesian era.  However, the first part of his philosophy was more popular than the second part.  The Clinton administration raised taxes and reduced civilian spending when times were good, but this was the exception rather than the rule.

A lot of smart people think the sick U.S. economy needs a stronger dose of Keynesianism than President Obama or the Democrats have been willing to propose.  I think the Keynesian medicine may not have as strong an effect as in the past.

We are coming down from an over-stimulated economy.  Under President Bush, the government cut taxes, especially in the upper brackets, while increasing government spending.  Government debt mushroomed, and consumer debt and the U.S. trade deficit continued their long-term upward trend.  This is something that could not go on forever, and so it stopped.  This limits the effectiveness of any stimulus.  People who get any extra money over and above what they need are going to use it to pay down debt.

We live in a global economy.  If we import increasing amounts of goods from foreign countries, any increased consumer spending is as likely to benefit foreign manufacturers as our own.

So it looks as if we have two bad alternatives.  One is to do nothing and let the economic stagnate.  The other is to try things that may have little effect.

I think we need to maintain the social safety net.  I don’t think we can cut off unemployment compensation for the long-term unemployed when there are five job-seekers for every job opening.  I think the federal government has to provide state aid to keep local government functioning.  You don’t foster a vibrant economy by laying off school teachers, closing public libraries and raising state college tuition. Budget problems have forced at least 38 of Michigan’s 83 counties, and an unknown number in other states, to give up paved roads.

Beyond that, I think we as a nation need to invest in things we need for our future – in infrastructure, education and scientific research.  And what better time to do it than now, when so many people are out of work and when interest rates are at near-record lows?

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