JOHN MASON - Time to stop Keynesian-type economic policies
Time to stop Keynesian-type economic policies
Maybe it is time for governments to stop relying on Keynesian-type economic policies to keep the labor markets near or at full-employment levels. Call this conclusion the result of unintended consequences.
Three times in Labor Day opinion pieces, one in the Financial Times by Michael Goldfarb, it was written that in the 1950s one-third of the jobs in the United States were unionized. Today, just one in 10 US jobs is a union job.
Another well-known fact is that since the 1950s in the United States, income inequality has grown immensely. The growth of real wages has become almost non-existent.
The presence of populism in the United States and Europe has become, according to many authors, a result of growing trends and the Great Recession. J. D. Vance, in his popular book, “Hillbilly Elegy” traces the roots of populism in the United States beck to the 1960s, and discusses Richard Nixon played on these “roots” to produce his “Southern Strategy” that helped him into the White House.
This time period is highlighted because the first really successful application of Keynesian-type thinking to government economic policy came out of the administration of John F. Kennedy in the early 1960s.
Keynesian-type thinking became prominent enough in that decade that President Richard M. Nixon claimed after his election that “We are all Keynesians, now.”
The basic idea was to use government’s fiscal budget to create sufficient deficit spending so as to fill-in the gap in the spending of the private sector of the economy so as to produce full employment. The original idea was to balance the government’s budget over the business cycle so as to keep the labor force as fully employed over time as possible.
In the ‘sixties, this idea was expanded upon using the empirical relationship called the Phillips curve that showed a trade-off between unemployment and inflation. The idea behind this relationship was that the government could continuously stimulate the economy and reduce unemployment even further over time at the expense of “modest” inflation. And, this idea has become a consistent part of Keynesian-type thinking ever since.
Why did Keynes produce such an economic policy program?
Well, Donald Markwell produced a book titled “John Maynard Keynes and International Relations,” published by Oxford University Press that laid out very clearly why Mr. Keynes wanted to keep economy at, or close to, full employment.
Beginning before World War I, Keynes became very disturbed by the Bolshevik revolution in Russia, the spread of Bolshevism into Germany, and the possibility of this spreading further into Europe and Great Britain. He seemed to be obsessed with this thought through the depression of 1920-21 and the Great Depression of 1929-33 and grounded a lot of his thinking in the concern that high rates of unemployment could lead to revolution, everywhere.
Keynes, for most of his life, bifurcated the world of economic thought into two segments, those that followed the Marxist line and those that followed laissez-faire economics. On the other hand, Mr. Keynes, according to Mr. Markwell, believed that “with clear and careful thought and appropriate action the world could be made a better place,” and that the key to progress was “getting our ideas right.”
But, who was the “our” that Mr. Keynes was referring to?
Well, Mr. Keynes was referring to the liberal, intellectual elite…more specifically those, like his friends who made up the Bloomsbury Set and the Cambridge society that he grew up within and thrived from.
The crucial point being that this liberal, intellectual elite would never be accepted or listened to by either the Marxist, who Mr. Keynes deplored, or the laissez-faire economists and capitalists, who Mr. Keynes had abandoned
Mr. Keynes, according to Mr. Markwell, basically saw the destruction of his “class” by either of these parties if they were to become the winners of this conflict. Hence, “The General Theory of Employment, Interest, and Money.” Mr. Keynes did not want to see his “class” destroyed.
The thing is, that the philosophy of Mr. Keynes, expanded upon by the work of Mr. William Phillips, of the Phillips Curve, became the foundation for US economic policy from the 1960s to the present time. The environment attributed to these over this time I refer to as “credit inflation,”
The behavior that became the undoing of the Keynesian-type policy was something Keynes had identified…and was actually a part of. He called these people “profiteers.”
To Keynes, profiteers could not be accused of moral blame for their actions, they were just active entrepreneurs whose windfalls were a consequence, not a cause of inflation. Profiteers just took advantage of price increases, regular, sustained price increases, and benefited from the credit inflation created by the government. By the early 1970s, gold, paintings, houses, commodities and other assets rose aggressively in price…and wealthy, sophisticated “entrepreneurs” took advantage of them.
And, this became a growing part of the US economy as these “entrepreneurs” increased their risk-taking, increased their financial leverage and also overdosed on financial innovation. Actual inflation faded into the wood-work and asset inflation and asset bubbles became the thing to watch for. Furthermore, the most successful corporations, especially “Big Tech” became experts in financial engineering, thriving off of stock buybacks in a low interest rate environment.
In addition, the wealthy, sophisticated “entrepreneurs” became so sensitive to the incentives created by governmental fiscal and monetary policy that expansionary programs went more into the financial circuits of the economy and not into the industrial circuits resulting in an economic recovery based more on consumer spending and not business capital investment.
The unintended consequences of this era of Keynesian-type policy making has led to the decline in the labor union and the substantial increase in income inequality.
Labor did not need unions because politicians conducted policies to keep the workforce employed. Of course, the politicians did not think about education, training, and other means to keep the labor force up-to-date because they were almost solely focused in putting unemployed people back into the jobs from which they were laid off from. And, workers counted on the government for their work…not the labor unions.
One does not have to say much about the income distribution matter, because the wealth and income went to those that benefited from financial engineering and speculation on asset prices.
To close the circle, populist uprisings took place at the ballot box as those “left behind” by the policies created by the “elite” to keep the “elite” in control began exert their discontent. And, this is where we are today.