“In the long run we are all dead.” – Keynes

Was Mr. Keynes a Victim of his Own Success?

By J.M. Hamilton (2-17-12)

“In the long run we are all dead.” – Keynes

It’s been nearly thirty years now. I sat in an elective economics class, kind of a low key introduction to Econ, taught by the Dean of the Business School.  I was still a child.  Economics was dazzling.  It was the mid-eighties.   Reagan was in charge, and had overwhelmingly won a second term.  It was morning in America.  Inflation and unemployment were fading, and the Neo-Classical school of economics was on the march.   Markets were impervious and self-correcting.  Keynes was, well, dead.

He received about a chapter of attention in the course, and his ideas seemed to be on the wane.

Keynes primary idea being that government has a moral obligation to step into the breach during an economic downturn, and via fiscal and monetary policy, stimulate demand, until  the private sector could get back up on its feet again.  Once the private sector is off the canvas, government then should retreat from its role of supporting demand, and let capitalism and free markets resume their prosperous march.   Keynes also argued that during the good times governments should raise taxes, so as to save up for the inevitable, the next economic down turn.  There was something else I was picking up about Mr. Keynes in the conservative journals of opinions I read at the time, something about his personal life.  And Republicans did not like it.  By inference, the personal attack then was sometimes used to discredit to some degree the man and his ideas.  It was the eighties, and as Dan Savage might say the equivalent to the dark ages in terms of gay rights.

The anti- Keynesian position, at the time, was government is evil.  The Private Sector rules!  Milton Friedman uber alles…. All hale Chicago School of Economics!

My hand timidly rose up in the lecture hall.

“Yes, Mr. Hamilton.”

“Ummm…. Could President Reagan actually be using Keynesian policy to stimulate the economy, presently, with the record deficits he’s been running?”

“Mr. Hamilton, see me after class.”

Oh $H!T!  But there was nothing to worry about, the Dean was cool.  There were no protest movements on campus, and I certainly wasn’t running with any fast or liberal crowds.  What was there to protest:  No War and Maximum Employment!   After class, the dean sized me up and said,

“Now Jay, in regards your question…  you’re a Republican right?”

“Well, yes sir.”

“Okay, then…. let’s move on.”  The subject turned to post graduation, employment and grad school prospects, etc., and my question went unanswered.   I inferred from the Dean’s evasion that one did not bring up Keynes in polite conversation.

Almost everything I have read, as of late,  indicates that Keynes ideas hit their apogee post-great depression, culminating with FDR and World War II, and enjoyed a glide path into the fifties and sixties; and then are seen as being discredited by the seventies (economic shock, high unemployment and higher inflation).  Then thirty years of indoctrination about infallible/self-correcting markets; Capitalism rules; and Keynes/Socialism was bad.  Just cut taxes, give the money back to the peeps (particularly the well to do), and all will be well.  And there were plenty of numbers that seemed to support Neo-Classical economics, like rising GDP and the Dow.  A rising tide did, indeed, seem to be raising all ships/boats/dinghies.

And I look back now over the last thirty years of economic history, and I believe I was right back in that lecture hall: Keynes ideas and thoughts had never left us.  Even in the 80′s, 90′s and 00′s, he was in the driver’s seat all along.  Oh sure, the jargon had changed, the ideology and mantras  were clearly different, but in the long run there was a permanence about Mr. Keynes and his ideas.  And in fact, I argue that the greatest Keynesian Presidents were not whom we would naturally think, FDR and Truman (for much of his presidency FDR was fixated on balancing the budget), but rather, Messrs. Reagan and Bush (W.).  These latter two Presidents may have talked a good Capitalist/Neo-Classical game, but in fact, both administrations were highly addicted to big government and government spending.  Their respective economies, and second terms, were dependent upon Keynes.

If we go back and look at the last thirty years we know the Federal debt to GDP ratio escalated significantly under Reagan, Bush (HW), flattened with Clinton (who actually ran budget surpluses), and continued to rise again under Bush (W).   The crisis thirty years of free market dogma and financial deregulation left on Obama’s doorstep has caused the debt to GDP ratio to climb even higher, 80% to 100% of GDP – depending upon whose figures one believes (and obviously, these ratios do not include underfunded liabilities such as social security, Medicare and Medicaid).   Moreover, government spending as a percent of GDP has seen a similar trajectory over the last thirty years, so that it’s now north of 40%.

That’s a lot of government redistribution for a nation of hardcore capitalist.

Republican administrations that pre-dated President Obama, starting with Reagan, actually, enjoyed a triple kick to the economy:  first there was growth in government spending (financed by foreign lenders) which helped demand; second tax cuts helped boost the economy on the supply side; and finally, the Maestro at the Fed basically placed a very large brick on the accelerator of monetary policy and the economy went into hyper-drive.   Many economists will tell you that government spending is a great boon to the economy, until such time as the debt to GDP ratio begins to hit 90% or greater.   It is at that point, which is now, that the debt burden can actually become a drag on the economy, due to interest payments on same, and expectations by the public and business community of higher taxes to bring the debt burden down.   In essence, at this debt level (90%) financing becomes a contractionary force (think of the crowding out effect alone).  Look at the major corporations and multi-nationals sitting on an estimated trillion in cash, due to fiscal uncertainty and the global banking crisis.

As a result, was Keynes a victim of his own success (?)… at the slightest hint of economic contraction in the last thirty years, Federal government spending went into overdrive; and even when the economy was on the mend, the spending still did not let up, and tax rates have been on a – relatively – steady decline, from Reagan through Bush – W (again with Clinton being the outlier). None of these Presidents seemed to want to raise taxes once the economy turned the corner, a key Keynesian prescription for fiscal sanity.

Keynes Blind Spot:  As of late, however, Keynesian policy seems to have hit the wall.   Trillion dollar deficit spending and ultra- loose monetary policy doesn’t seem to be spurring the economy in the manner they once did.   I’m no expert but did and could Keynes foresee that a massive banking cartel, the world is presently faced with, could and would refuse to lend out monies generated by expansionary Fed and E.U. central bank policy?  The Cartel in essence refusing to lend out money to stimulate growth – instead largely engaged in speculation or hoarding, due to impaired balance sheets or simply out of political spite, via capital strike.  Did Keynes foresee that Republicans deploying Keynesian policy and supply side economics, coupled with three decades of untrammeled mergers and acquisitions, would create massive monopolies and oligopolies, which via regulatory and government capture, would siphon off a not insubstantial share of fiscal and tax policy benefits?  Here, Keynesian policy was not directed, as he intended, for the betterment of the working man and to achieve maximum employment; but rather, Keynesian policy – wearing Neo-Classical garb – appears in many instances to have been bastardized and government expansion, rules and regs, were utilized for the enrichment of the few, the proud, the elite!

One can only speculate, but my guess is:  If he was here with us today, faced with the tremendous success of his own policies, and faced with the present limits of same, no matter how perverted and warped by successive Republican administrations, Mr. Keynes would have been a fan of the Volcker rule (which thwarts utilization of Fed monies for speculative purposes and deploys monetary policy to its traditional role of lending money); and he may have been positive about the breakup of the too big to fail banking cartel, which seems to be sucking the heart and soul out of expansionary monetary policy.  My guess is the humanistic Keynes, who had a vision of a harmonious world, would have wanted to shift the largess of government – both demand and supply-  away from the wealthy and the powerful, and back to those most in need, the ninety-nine percent – arbiters of top line growth, an expanding economy, and greater corporate profitability.   In the present, Keynes’ policies may have not been limited to objecting to proposed cutbacks in the welfare state, but instead, Keynes probably would have been for positions that limited – at least ameliorated – the impact of globalization, and protected workers rights and wages.

The old saw of a “rising tide lifts all ships,” also works in reverse, if you catch my drift; that is, we’ve all heard of “trickle down,” well perhaps a good term for the inverse is “flood up.” Imagine if you will, banks and GSE’s refinancing, or better yet, restructuring residential mortgages in this country, and we could all see “flood up” in action.

Mr.  Keynes’ proscribed policies are said to have only begun to break through to FDR, later in his presidency.   Such irony that Keynes greatest ideological detractors should end up being his greatest practitioners, the Republican Party for the last thirty years.

Copyright JM Hamilton Publishing 2013