What would Keynes Do?

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    Oct 04, 2011 3:07 PM GMT
    Many who call themselves Keynesians use the label as intellectual cover to spend more of other peoples' money. When it comes to what John Maynard Keynes actually believed, we see there some rather divergent thoughts to those who today believe in stimulus.


    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.

    I recommend reading the whole thing.
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    Oct 05, 2011 1:14 AM GMT
    A more selective interpretation of Keynes:

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    Oct 05, 2011 1:16 AM GMT
    Of course the thing about Keynes is that Keynes would not likely have agreed with himself in earlier comments as he himself was opposed to infrastructure spending: