June 8, 2012 [LINK / comment]
The latest economic reports on sagging employment, and the worsening financial peril in the Euro zone raise the risk of a second major downtown in the U.S. economy, at the worst possible time for President Obama. This situation raises the stakes in the eternal debate over which kinds of economic policy would be best suited to get the economy growing again. The stated positions of Obama and his challenger Mitt Romney are quite clear. What is less clear is the theoretical rationale behind the various alternatives.
Seeking to shed light on the matter, Facebook friend Andrew Murphy wrote an article on John Maynard Keynes at Harry's Place. His main point was to debunk the widespread stereotype of Keynes being a left-wing apologist for deficit spending. Not! Murphy cited Keynes' classic book, General Theory of Employment, Interest and Money (1937): "The boom, not the slump, is the right time for austerity." Some people infer from that that Keynes would endorse deficit spending by countries in trouble, such as Spain or even the United States. Personally, I think the lesson to be drawn is grimmer: that failure to tighten belts when times are good means that belt-tightening will become even more necessary and painful when times are bad.
My comment on Facebook:
Very good article, helping to separate Keynes the real-world economist from Keynes the punching-bag cliche. You're quite right that Keynes would be appalled by some of the irresponsible policies that are done in his name. Likewise, he was indeed a moderate pragmatist by temperament, but I wouldn't go as far as calling him "conservative." After all, he did believe in active government intervention to stabilize the economy, something that becomes dangerous when electoral politics start distorting things. I don't think it's helpful to assess his ideology in terms of preferred tax rates, given the vastly different historical context. But the biggest point to make is that Keynes always assumed governments would be prudent enough to run a surplus in boom years, so that counter-cyclical stimulus measures could be done without bankrupting the treasury. Thanks to Grover Norquist and his tool Dubya, that option has been largely voided.
Common sense tells us that government has a proper role to play during times of true economic emergency. Indeed, while we're on the subject of myth-breaking, even Republican President Herbert Hoover had already begun small-scale stimulus measures, contrary to the image of him being a tight-fisted apostle of laissez-faire. I'm sure that Mitt Romney would be pragmatic enough to adopt appropriate measures on a selective basis, and would be immune from the political pressure that Democratic presidents have to reward their labor union supporters.
I actually read Keynes' General Theory when I was in graduate school (American University), and even though I was already under the influence of free market ideas of Milton Friedman, I did get a lot out of the book. There are long sections where his logic utterly escapes me, which may reflect either my own mental shortcomings or perhaps his proclivity for ivory-tower abstractions, but there is also a lot of hard-nosed pragmatic economic sense. As long as you keep an open mind and remember to distinguish Keynes himself from his wayward left-liberal followers, you too might get something out of reading it.