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Saturday, December 20, 2008

Heckomics: John Maynard Keynes

From Culture11

Heckonomics: John Maynard Keynes

Who the heck was he, and why is he being resurrected now?

By Timothy P. Carney, December 21, 2008

If you follow the headlines about Washington’s response to our current economic hardships, you’ve probably come across the adjective “Keynesian” in the past couple of weeks.

From context, or if you remember a little bit of economics, you probably know that this has something to do with government spending getting us out of a recession. Or maybe you don’t know that, but you’ve heard people repeating, ironically or sincerely, the mantra “we’re all Keynesians now.”

In any event, you should know who Keynes was and what “Keynesianism” is, because we’re being fed it by the shovelful.

The man

John Maynard Keynes (pronounced like “canes,” those things they use for corporal punishment in Singapore) lived from 1883 to 1946 amid the elite of British society. He went to Eton prep school and then Cambridge University. He hung around Virginia Woolf and her friends, reportedly dabbling in homosexuality and eugenics before settling down with a ballerina and economics.

Keynes’s formative professional years were optimistic times, and despite the Great War’s not visibly having ended all wars, liberal intellectuals believed in their ability to fix the world. John Dewey was going to create an educational program that would eliminate ignorance and religious belief, Margaret Sanger was going to create the pills and social policies that would eliminate poverty and disability, and John Maynard Keynes was going to create the economic framework that would eliminate recessions. He believed “the economic problem may be solved,” meaning we could forever shed the curses of periodic busts and persistent poverty.

So, this is the sort of man Keynes was. He was very bright and very confident that smart enough people of good will could solve the world’s problems as long as they were able to dismantle the prejudices of culture and control the behavior of the unwashed. And today we’re told that he is making a comeback, and that we are all Keynesians now. What the heck could that mean?

The -ism

“Keynesiansm” is an overused and misused term, which is inevitable, considering that the public learns this term from journalists, a class for which economics is not a forte. To some extent, it’s pointless to argue about “what Keynesianism really means,” because, like it or not, words mean what people understand them to mean.

So, in the broadest sense of the word — the one most political journalists use these days — Keynesianism is the idea that we need to increase government in order to emerge from our economic slump.

In the narrowest sense of the word — obviously capturing only one element of Keynes’s doctrines, and not at all explaining its context — Keynesianism is the notion that government ought to run budget deficits in order to stimulate the economy out of a slump, and also should run surpluses during boom times. In practice — in the New Deal, the 1970s, and today — this means that government should increase spending in order to stimulate the economy.

Any conservative, though, has an instant response: government doesn’t create wealth, it taxes wealth. As writer Russell Roberts puts it, taxing and spending our way to prosperity makes as much sense as the belief that “moving water from the deep end to the shallow end actually leads to making the water deeper.”

Keynesians reply that government does more good with the money than the market would. First — and this is the favorite of populist politicians — poor people actually spend money while wealthy people only save it. Second, if government borrows the money, it borrows it at lower costs than any market participant, meaning government can stimulate far more cheaply than can companies or individuals. Third, by picking the right projects, bureaucrats can ensure that they spend the money in a way that creates a “multiplier effect.”

Public works provide jobs, they say, which means more people getting paid, which puts money in the pockets of consumers, increasing demand for consumer goods, which then creates supply.

Armed with this theoretical justification to spend more than they bring in, government types look for what sort of spending will be the most stimulating. Transportation infrastructure is a perennial favorite, because of the belief that building roads, bridges, and airports “creates jobs,” and makes the economy more fluid.

This will be the debate in coming weeks: what is the most efficient way for government to stimulate the economy? The premise of this debate is Keynes’s notion that recession calls for deficit spending. Austrian economists, supply-siders, and other free-market types reject this premise, but everyone in politics embraces it. A similar situation is what caused Richard Nixon to say, “we are all Keynesians now,” a saying which gets trotted out quite a bit these days.

While it has a bias towards spending, Keynesian thought professes that deficits per se — even if brought about by tax cuts — are good because getting money into the hands of consumers “primes the pump” of the economy.

What the heck is “priming the pump”?

Until this week, every time I heard someone talk about government spending “priming the pump,” I envisioned the primer button on my parents’ lawnmower, which I pumped a couple of times to get gasoline into the engine. But that’s “pumping the primer” or “priming the engine,” not “priming the pump.”

“Priming the pump” has to do with pumps — like water pumps. The metaphor is pretty opaque to the modern eye, once you start thinking about it. How does one prime a pump, and why?

I’ve never done it, and neither has my dad, who may be the oldest guy on the planet. I poked around a bit, and came up with this explanation for “priming the pump”:

Think of a pump coming up out of a well. It works by suction. If air gets in the pipe, then it may be nearly impossible to get water out of it. “Priming the pump” appears to be pouring water down the pipe to flush out the air. This makes the pump actually work.

So, returning to the analogy: maybe the economy is weak, and so people’s labors (pumping the handle) aren’t generating wealth (water). Only by taking some wealth (water) that’s sitting around, and injecting it back into the economy (pouring it down the pipes) in the form of government spending, can you make labor (pumping) productive.

Sounds kind of nice, doesn’t it? We need to sacrifice a little bit now, to make labor more productive in the future, right?

“In the long run we are all dead”

The problem with the prime-the-pump metaphor is that it reflects the opposite of Keynes’s philosophy. Rather than believing in delayed gratification, Keynes believed that through government action, we could avert the boom-bust cycle by maintaining a permanent boom.

Editing Thomas E. Woods’ forthcoming Regnery book Meltdown, I was treated to this revealing Keynes gem in his book General Theory: “The remedy for the boom is not a higher rate of interest but a lower rate of interest! For that may enable the so-called boom to last. The right remedy for the trade cycle is not to be found in abolishing booms and thus keeping us permanently in a semi-slump; but in abolishing slumps and keeping us permanently in a quasi-boom.”

Again, Keynes believed that if enough smart people of good intentions had enough power, they could create heaven on Earth. What stood in the way was excessive concern about tomorrow. When people saved too much, they were making us poorer by leaving resources idle. One pernicious effect of religion was making people concerned about eternity rather than about the near future.

Most importantly, through central management and constant inflation, we could achieve permanent boom. If Ludwig von Mises argued that such behavior would make the long-term collapse even that much more painful, Keynes responded, “In the long run we are all dead.”

This is the heart of Keynes’s thought, and it is relevant in two ways. First, you don’t need to worry about a hangover if you keep drinking your Red Bull and vodka and never go to sleep. Second, suffering through short-term evils for the sake of the long run is folly. All problems should be, and can be solved — often, in practice, by government.

Why he’s coming back

Just as there are no atheists in a fox hole, there are no free-market politicians in an economic downturn. Politicians have to do something. Whether it’s Bush’s weird stimulus tax cuts in the form of checks from the IRS, or Obama’s planned trillion-dollar stimulus spending on infrastructure, all politicians become Keynesians when the economy turns down.

The alternative — doing nothing, or even getting government out of the way, and waiting for the invisible hand to correct things — is not a viable option, lest you be called a modern Herbert Hoover, standing idly while the economy burns (a completely false depiction of the very interventionist Hoover, as you know if you read my prize-winning 2006 book, The Big Ripoff).

Did Keynes’s arguments really convince FDR, Richard Nixon, George W. Bush, and Barack Obama? Maybe subtly, but Dan Mitchell of the Cato Institute has the best explanation for the persistence of Keynes’s approach:

“Politicians just love to spend other people’s money, and Keynesianism is a convenient rationale.”

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