The Return of Keynes

"It is, it seems, politically impossible for a capitalistic democracy to organize expenditure on the scale necessary to make the grand experiments which would prove my case -- except in war conditions."

-- John Maynard Keynes, July 1940

The New York Times has named our present economic condition the Great Recession. But a recession, as usually defined, is a modest downturn, which will be righted by either natural economic forces or mild government intervention. A "great" recession, therefore, is a contradiction. Moreover, a recession technically ends when durable growth turns positive. Unfortunately, while growth has been positive for more than a year, stagnation obviously persists.

A depression, by contrast, is a prolonged, self-perpetuating slump. Today, as in the 1930s, the elements include a vicious circle of depressed wages, reduced demand, damaged banks hesitant to lend, and businesses reluctant to invest. In a depression, gross domestic product is the wrong test of restored health. Growth was positive for most years after 1933, but the economy remained in what the economist John Maynard Keynes called an "underemployment equilibrium," something impossible in the classical economic theory that he challenged.

Despite a less dire unemployment rate, the deeper dynamics of our present situation are closer to depression than recession. And Keynes' insights are as fresh, relevant, and insurgent as ever. This is another Keynesian moment.

Or is it? Keynes was, above all, a consummate outsider whose laurels far exceeded his practical influence. His career as a statesman began with his prophetic (and ignored) warnings that the draconian terms of the 1919 Versailles settlement would destroy Germany's economy and bring depression and renewed conflict to the rest of Europe. Keynes' career ended, shortly before his death in 1946, with Keynes being outmaneuvered by American diplomats in the implementation of the Bretton Woods arrangements. These turned out to be far less "Keynesian" in practice than in Keynes' design.

In between those years, Keynes achieved uneasy celebrity within the economic profession. For a brief period after his death, nearly everyone was a self-proclaimed Keynesian. Yet his remedies, "on the scale necessary," were accepted only by the historical accident of World War II. As the power of today's austerity crusaders attests, what Keynes attacked in his day as the "Treasury View" has exact counterparts in the undertow of fiscal conservatism among opinion elites, on Wall Street, and for that matter, in the world's treasury departments.

While a partial American Keynesian governed in the person of Franklin D. Roosevelt, Barack Obama is no FDR. And unlike in the 1930s, Wall Street has survived a financial crash of its own making with its political influence and financial structure largely intact. So Keynes is as radical as ever, still substantially a prophet with honor but without influence, though events keep vindicating his prophecy.

This is a good time to revisit what Keynes actually wrote and argued. For the most part, his own writings are witty and non-technical and exhibit dazzling range. As Keynes once said, lecturing in Stockholm in the late 1930s, "What I have to say [is] intrinsically easy. ... It is only to an audience of economists that it is difficult."

For those seeking a precis rather than the sublime original, two new briefs provide a lucid recapitulation that is also pleasurable reading. Robert Skidelsky, Keynes' definitive biographer, and Peter Clarke, an eminent historian who has published extensively on Keynes, have both written deft books of little more than 200 pages of text. These might have been the same book, but happily Skidelsky goes more deeply into a Keynesian assessment of the current crisis, while Clarke does a more comprehensive job on the arc of Keynes' life, career, arguments, and relevance. Each nicely complements the other.

Clarke and Skidelsky both remind us that deficit spending in emergencies was a small part of the Keynesian revolution. Keynes was equally concerned about avoiding inflation at full employment. His deeper purpose in the use of deficit spending was to promote investment and enterprise, not just consumption. His was not an economics only for emergencies; Keynes' challenge to the economic orthodoxy was systematic, not merely tactical, demolishing the classical premise that markets were self-regulating, that savings necessarily equaled investment, and that the sum of individual preferences aggregated to an efficient whole. He was also deeply concerned about the curse of austerity policies, the role of uncertainty in undermining the premise of economic rationality, and financial speculation in undermining the real economy -- all insights urgently relevant today.

Keynes was dismayed at the watered down and overly mechanical version of his work that passed for "Keynesianism" in much of the economics profession, especially in the United States. Clarke writes, "After dining with a group of American Keynesian economists in Washington, DC, in 1944, Keynes said at breakfast the next morning, 'I was the only non-Keynesian there.'"

Skidelsky picks up the story with an excellent, concise account of the turning away from Keynes as the postwar era evolved and the abrupt reversion to a quintessentially Keynesian crisis in 2007. The crisis, he writes, combines three interconnected failures that would be all too recognizable to Keynes: an institutional failure -- "banks mutated from utilities into casinos"; an intellectual failure of the new classical economics and the older theory on which it rests; and a "moral failure: that of a system built on money values."

Keynes, as brought to life by Clarke and Skidelsky, was far more than a renegade economist -- he was a liberal in the best sense of the word, as well as a pamphleteer, popular and scholarly educator, and statesman. Neither book, interestingly enough, offers a detailed blueprint of how to apply Keynesian teachings to the present mess. But the inferences are all there in these elegant accounts of Keynes' own work.

***

I began with Keynes' observation about World War II -- written well before the U.S. entered the war and before the wartime buildup fully cured the Great Depression -- because the point is so chillingly apt. Today, the Federal Reserve is out of tricks. Deficits of about 10 percent of GDP are plainly not curing the slump, but they are giving politicians hives and inviting new austerity crusades. In the four years of World War II, we incurred annual deficits of nearly 30 percent of GDP, damned the torpedoes, and blasted out of depression into durable recovery. As Clarke quotes Keynes speaking a decade earlier, "You will never balance the Budget through measures which reduce the national income. ... Look after unemployment, and the Budget will look after itself."

With the postwar boom, the huge debt ratio indeed came nicely down. A similar burst of public investment and deficit spending, but without the war, is the obvious and perhaps the only cure for today's mess. But we do not have anything like the political leadership to make that case to the public.

If the Times' "Great Recession" is misleading, a better phrase is the Great Stagnation. Though the dynamics are all too similar, to call it Great Depression II would be, well, too depressing. If we revisit Keynes and take his insights to heart, we may still avoid that fate.

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