Keynes

  • May 20, 2012
  • Chancellor Angela Merkel of Germany is in trouble.  So is David Cameron, Prime minister of Great Britain though not as much.  Merkel has an election looming and both have been caught on the wrong side of the most important political-economic issue of the generation, the continuing depression and joblessness plaguing Europe and to a lesser degree the United States.

    Economists disagree about what to do.  We often call them political economists in part because their judgments and advice are sometimes couched more in political terms than in the social science of economics.  Thus we have two schools of thought on how to recover from the economic crash.  One school, holding sway mostly in Europe, demands austerity while the other, a mostly American driven idea, call for stimulus.

    So far the stimulus advocates can claim better results and if you read Paul Krugman’s new book, “End This Depression Now” you get the unmistakable notion that additional stimulus could do a lot to pull the global economy out of its tail spin.  So why don’t we all stimulate?  Krugman owns a Nobel Prize in Economics and knows what he’s talking about.  He considers himself a Keynesian after John Maynard Keynes, the mid twentieth century economist who invented, more or less, the branch of economics we call macroeconomics which is the obverse side of the coin from microeconomics.

    It’s difficult to quantify, but if you’ve had any conversations with regular people, as I have recently, you see the two camps run deep.  The Austerians as Krugman calls them want austerity, smaller budgets, increased savings, less government spending.  The Stimulators think this is exactly the time for government to spend money, deficits be damned.  There will be time later, they say, when the economy is back on its feet, to raise taxes and pay for the spending.

    Who’s right?  Each side thinks it is.  And you know what?  Each side is, though only one can be right in the context of today’s economy.  Economists have been famous for this kind of duality, so much so that Harry Truman once got tired of economists speaking to him in the vernacular of “on one hand and then on the other hand,” that he asked his staff to find him a one armed economist.

    But back to stimulus and austerity or macro vs. micro.  The austerity people have a clear idea of how to pull out of a personal economic crisis.  Stop spending more than you take in, pay down debt, save a little and you will be out of the woods before you know it.

    The macro people say that’s the problem.  We’re not dealing with micro or personal economics but with macro, global economies and they operate differently.  If everyone takes the austerity approach spending will decline and the economy will go into a tailspin.  As Krugman rightly points out, my spending is someone else’s revenue and in a big economy that inevitably drives the spending that results in what I call a paycheck.  That’s why when everyone is not spending either the government picks up on spending for a little while or the economy spins down into a deep hole.

    Typically, governments spend on roads, bridges, teachers and other public infrastructure.  They also spend on unemployment insurance.  Unemployed people are a great investment because you can count on them to spend the money they get and spending is what spins an economy up.  Also, in a recession, with construction at low levels, government can get these things at bargain prices again putting money into the economy.  And if you buy productive assets like infrastructure, you have these things to work with as the economy improves.  Government spending is like training wheels, soon you don’t need them and you ride off on your own.  Think of this as investment.

    Unlike the U.S. the Europeans have a small problem with infrastructure spending or any other kind of spending.  The spending, if it happened, would occur with German money in non-German countries so the Germans are reluctant to try this approach.  That’s the problem of having a unified currency but a non-unified government where each state is sovereign.  There is also more than a touch of righteous moralizing going on by the haves over the have-nots.

    The German conundrum notwithstanding, there is a huge body of evidence from studying the Great Depression of the 1930s onward that shows government spending drives recovery from severe economic crashes.  The body of evidence also shows that failure to spend simply deepens the hole everyone is in.

    Krugman and his colleagues would have liked it if the U.S. stimulus had been bigger or if multiple tranches of stimulus had been applied.  The people who say stimulus doesn’t work are the same ones who denied further spending and fought against the original stimulus plan.  All that is water under the bridge.  A kind of social experiment has nonetheless been performed and the economy that was stimulated, even inadequately, is doing much better than the economy with the brakes on.

    If that’s not enough, what Merkel sees is that the French just elected Francois Hollande, a Socialist who promised to focus on stimulus and job creation in diametric opposition to Nicolas Sarkozy, a Merkel acolyte.  So we were treated to a delicate face saving about face by Merkel this weekend when the leaders of the G8 convened at Camp David with the unofficial goal of convincing Germany that austerity isn’t working and won’t.

    Merkel really likes her policy and is not going to change her mind easily.  But with that election looming, she is at least now saying that austerity and job creation must go hand in hand.  Such is progress in international politics.  One wonders how much faster things would go if Merkel had a chance to see first hand how her policies are affecting millions of people.

    Published: 6 years ago


    The economy appears to be on the minds of magazine editors these days and no wonder.  With the stimulus running out the economy appears to be headed south again.  This contradicts my experience last week in Silicon Valley where the CEOs I met with said they were,

    1)   Raising more money, not because they need it but because it’s cheap and the VCs are having a hard time finding good late stage investments.

    2)   Readying for market new offerings aimed at specific segments that may have been under served before.

    3)   Desperately trying to hire people.  The people I met with have openings whose sheer numbers astound you.  The CEOs I met with told me the could easily double their sizes in the coming year if only they could find 50, 100 or 200 qualified people.  At Dreamforce Marc Benioff said his company has about one thousand openings.

    These and many other CEOs know that they have to hire ahead of the demand curve and demand is brisk.  To be sure, the jobs we’re talking about are not aimed at the unemployed factory worker — at least not the one who hasn’t been retrained.  That brings up a difficult discussion of how we as a society respond to changes in the marketplace and the value of our educational system.  This piece is not intended to be a deep dive on either, merely an observation.  But back to the magazine editors.

    On the flight home I managed to read almost the entire October 1 edition of The Economist it’s the one with the cheerful picture of the universe and a black hole.  Superimposed on the blackness are the Halloween-ish words “Until politicians actually do something about the world economy…Be Afraid”.  Inside the issue takes aim at politicians on both sides of the Atlantic and the lead editorial ends with something so succinct I see no reason to attempt to paraphrase it and so I quote it in full:

    “Lacking conviction and courage

    In the aftermath of the Lehman crisis, policymakers broadly did the right thing. The result was not a rapid return to prosperity in the West, but after such a big balance-sheet recession that was never going to happen. Now, more often than not, policymakers seem to be getting it wrong. Their mistakes vary, but two sorts stand out. One is an overwhelming emphasis on short-term fiscal austerity over growth. Fixing that means different things in different places: Germany could loosen fiscal policy, while in Britain the reins should merely be tightened more slowly. But the collective obsession with short-term austerity across the rich world is hurting.

    “The second failure is one of honesty. Too many rich-world politicians have failed to tell voters the scale of the problem. In Germany, where the jobless rate is lower than in 2008, people tend to think the crisis is about lazy Greeks and Italians. Mrs Merkel needs to explain clearly that it also includes Germany’s own banks—and that Germany faces a choice between a costly solution and a ruinous one. In America the Republicans are guilty of outrageous obstructionism and misleading simplification, while Mr Obama has favoured class warfare over fiscal leadership. At a time of enormous problems, the politicians seem Lilliputian. That’s the real reason to be afraid.”

    That “collective obsession with short-term austerity across the rich world” and getting it wrong generally, were the subjects of another economists life’s work.  John Maynard Keynes lived and wrote in the first half of the twentieth century about times that are increasingly looking like our own.  In a well written and very useful article by John Cassidy in the October 10 issue of the New Yorker, Cassidy asks the essential question — What would Keynes do?

    In practice Keynes would do nothing as he was never an elected official but he did advise them.  His prescription would have been to increase aggregate demand — that sounds like complicated economicese but it really boils down to stimulus.  Get people working and paying taxes and while we’re at it lower taxes to make spending more attractive.  That means the government as buyer of last resort.  As the economy recovers those policies can be trimmed and the debt incurred by the government can be repaid.

    All this stands in sharp contrast to The Economist’s observation that an “overwhelming emphasis on short-term fiscal austerity over growth” is causing harm to the global economy and no good aside from giving politicians the chance to strut for increasingly tiny fringe audiences in advance of an election.

    The politicians in California are safely sequestered in places like Sacramento and HP where Meg Whitman who recently ran for governor now presides.  The Silicon Valley economy is by all measures thriving.  What do they know that we should?

    Published: 6 years ago