Rubin Reports

The Keynes Mutiny

“It is ideas, not vested interests, which are dangerous for good or evil.”

— John Maynard Keynes

We should always challenge the simplistic claims of the left–often echoed by the simplistic, stereotyped response of the right, which falls into the left’s trap–about the nature, origin, and “liberalism” (rather than radicalism) of its ideas.

Here’s a simple chart:

  • Obama and the Obamites: We are true heirs of liberalism and it is good.
  • The Opposition: You are true heirs of liberalism and it is bad.

Me and (hopefully) you: Wait just a moment there, Binky! You’re radicals pretending to be liberals and we can prove it. Centrists and real liberals should be supporting the opposition today against you.

Consider John Maynard Keynes, who the current left claims as the patron of its economic policies. Of course, there is some justification for this idea but I believe Keynes would have been horrified by contemporary Obama administration policy.  True, Keynes advocated high government spending to stimulate economic growth. Let’s examine Keynes’ advice to President Franklin Delano Roosevelt to see how he might differ with disastrous current policies.

Remember what Roosevelt had been doing in his first months in office. His basic strategy was to restrict prices and slap on high levels of production controls, an approach neither side in today’s debate would advocate. So part of what Keynes was doing was to get Roosevelt to reduce the regulations restricting business that the president had imposed in his first months in office, another difference from Obama.

In his letter to Roosevelt of December 16, 1933, Keynes wrote: “The object of recovery is to increase the national output and put more men to work.” In other words, these two factors were the measure of success and Obama has failed on both fronts. Keynes wouldn’t be impressed by the blame-Bush tactic.

Keynes continues:

In the economic system of the modern world, output is primarily produced for sale; and the volume of output depends on the amount of purchasing power, compared with the prime cost of production, which is expected to come on the market. Broadly speaking, therefore, an increase of output depends on the amount of purchasing power, compared with the prime cost of production, which is expected to come on the market.

So Keynes argued that the key to success was to increase the public’s purchasing power and there were three ways to do so.

The first was pure persuasion: “Individuals must be induced to spend more out of their existing incomes.” Roosevelt had tried to do this by showing Americans that there was “nothing to fear but fear itself,” but the situation was too bad for mere words to work.

The second was in many ways the kind of policy that Republicans favor today:

The business world must be induced, either by increased confidence in the prospects or by a lower rate of interest, to create additional current incomes in the hands of their employees….

A better way to state this sentence would be to stress that if companies expanded, or hired additional workers, or produced more (thus paying other companies who could hire workers), then the economy would recover.

Note that Obama says this approach has never worked. But that is not what Keynes said!  On the contrary, he explained that this would be phase two, “as the second wave of attack on the slump after the tide has been turned by the expenditures of public authority.”

In Keynes’ model then, after Obama’s initial stimulus—Keynes’ phase in which “public authority must be called in aid to create additional current incomes through the expenditure of borrowed or printed money”—Obama would not have proposed more of the same but switched over to an approach like that proposed by Mitt Romney. Obama’s administration has not heeded the advice of Keynes.

But there’s more! He continued:

I lay overwhelming emphasis on the increase of national purchasing power resulting from governmental expenditure which is financed by loans and not by taxing present incomes. Nothing else counts in comparison with this.

So while Keynes so far would have apparently endorsed Obama’s initial approach—but more on this in a moment–he would have criticized Obama’s bitter clinging to it. And he would criticize Obama on another point as well:

…as the prime mover in the first stage of the technique of recovery I lay overwhelming emphasis on the increase of national purchasing power resulting from governmental expenditure which is financed by loans and not by taxing present incomes.

Keynes approved of borrowing money but not by raising taxes, so again he differs with Obama. Keynes understood that raising taxes in a depression was a disaster.

In addition, while Keynes explained that he was not qualified to discuss how the money should be spent by government, he favored large-scale infrastructure projects. For the New Deal that would mean projects like the Columbia River and Hoover Dam, the Tennessee Valley Authority, and huge public works which all benefited the American people.

Has any economic project of Obama’s first 3.4 years benefited the general public?

Yet while Obama talks a lot about bridges and infrastructure, his spending went largely to unproductive causes like subsidizing government payrolls and public workers’ pensions, as well as corrupt green energy schemes. In other words, Keynes would not approve of how the money was thrown around.

Of course, when Keynes was advising governments the situation was in many ways different from today. Governments were far smaller and less all-pervading; regulation was relatively tiny; debts were not staggering. Today we also have a tidal wave of entitlements and pension plans, plus much greater international competitiveness, with the United States lagging  due to high wages, regulations, and taxes in the United States. Keynes’ prescription was far more rational in his day than it is today. It is one thing to advocate peacetime deficit spending as a virtual innovation and something rather different to do so after it had been done for decades.

I suggest that if Keynes were alive today he’d agree with this article and disagree with Obama. Do not take it for granted when the current political and intellectual hegemons claim the mantle of historic liberal heroes.