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
