Never-ending Keynes

We should all remember the name John Maynard Keynes, born this month, on June 5th, 1883. If this name is not familiar to you, it probably should be. You should also know, in general terms, what the term “Keynesian economics” means. Keynes died in 1946, so there is obviously some reason for his name to have been forgotten. The influence of the economic theory named after him has declined over the past half-century. But Keynesian effects have continued to be active, even during the reign of presidential administrations that rejected them.

Briefly, the key feature of Keynesian economics is the concept that aggregate demand controls the overall success or failure of an economy. If the aggregate demand for goods and services increases, then the economy expands. If there is a slump in demand, the economy declines. In general, demand comes from consumer spending, but government can influence demand either by purchasing goods and services directly or by distributing money (i.e., through wages or safety net payments) to people who will then purchase goods and services. The effect can be self-supporting; if demand goes up, employers hire more people to meet that demand, which provides more money that will be used to increase demand.

Keynesianism began to lose favor in government during the inflationary times of the 1970s, when the monetarist theories of economists like Milton Friedman were gaining influence. Monetarism is often called “supply-side” economics because it emphasizes controlling the economy by manipulating the availability of money. Thus a monetarist government chooses to stimulate the economy by such strategies as cutting taxes on investors, thus releasing funding for further investments in production facilities and employment. The problem with monetarist stimulus is that there is no incentive for that additional money to go into productive investments. If there is no increase in demand for specific goods that could be produced, any added goods and services will become unsold surplus. In the absence of demand, new investment funds will likely go into purely financial schemes, raising the prices on existing goods or stock prices and encouraging speculative bubbles.

Supply-side strategies (also known as “trickle-down” economics) have failed repeatedly, both during the 1980-1992 Reaganomics period and the 2000-2008 Bush administration. Unfortunately, those who still promote supply-side, now in leading roles in the Trump White House, can deny that reality because those failures were largely masked by contributions from Keynesian activity which are ignored by Reagan/Bush promoters.

Supporters of Reagan and Bush, and of monetarism, argue that the periods of economic growth that occurred during those presidential administrations were the result of the large monetarist tax cuts that were passed at the beginning of each reign, providing large infusions of “supply-side” cash. However, the record is not pure. Both presidents also engaged in what might be called “military Keynesianism”; Reagan massively increased defense spending in pursuit of the cold war, and George W. Bush did the same by involving the U.S. in wars in Afghanistan and Iraq. This was a form of Keynesianism because it involved massive direct purchases of new goods, even if the goods in question were unnecessary and/or destined to be destroyed. Without the increased demand created by military spending there likely would have been minimal or no economic stimulus during the Reagan and Bush years. Admittedly, “military Keynesianism” in the buildup to World War II was also the stimulus that finally pulled the United States out of the Great Depression of the 1930s, but nobody pretends that that effect was caused by purely monetarist policies.

Just prior to World War II there was a non-military form of Keynesianism at work, with the federal government actively hiring people to build infrastructure—roads and dams and bridges and government buildings and art to decorate them and plays and poetry. Money and jobs were pumped out through the Works Progress Administration with a strong preference for labor-intensive projects. This was the most purely progressive form of the strategy, a combination of “employment Keynesianism” and “infrastructure Keynesianism” that proved effective in expanding the economy and helping to alleviate the misery caused by the depression and, in many cases, creating lasting useful structures. Money was also added to the economy through a wide variety of subsidy and grant programs, including social Security. The key element was that the federal funds were distributed primarily to individuals who would quickly (because of economic necessity) spend them on new goods and services, increasing consumer demand.

Now there is another grand strategy with a new claim to solving all of our economic problems. When you hear about it, it may seem more like avoidance of reality, or an extreme workaround. It has been given the title Modern Monetary Theory (MMT), a name that manages to be both pretentious and decidedly non-descriptive. For fans of economic derivations, the current Wikipedia entry notes that “MMT synthesizes ideas from the State Theory of Money of Georg Friedrich Knapp (also known as Chartalism) and Credit Theory of Money of Alfred Mitchell-Innes, the functional finance proposals of Abba Lerner, Hyman Minsky’s views on the banking system and Wynne Godley’s Sectoral balances approach.” MMT is therefore sometimes known as Neo-Chartalism, a designation that is only minimally more informative.

The essential concept behind MMT is that money is a creation of government, so that when a government borrows money it is really taking back what it originally loaned out; it is not really borrowing. And whenever a government spends money, no matter what it buys, it is adding wealth to the private sector. In short, government deficits and debt are meaningless and government spending is a net positive, so there are good reasons for government to “borrow” money without actually borrowing it from anyone, and without the need to repay it. This process is potentially limited only by the recognition that excessive spending in any sector tends to increase inflation. In the United States, we also have a political limit imposed by the federal debt ceiling statute, but, as we have seen recently, there are ways to get around that.

The result is guaranteed to make many people nervous. After all, there are still influential people who desperately want to return to the gold standard, under which every dollar in circulation was backed by, and in theory exchangeable for, the gold stored in vaults in Fort Knox, Kentucky. But at least the current dollar has the imprimatur of the federal government. In the era of purely private fabrications like bitcoin, MMT doesn’t sound like such a stretch. We have, perhaps, recognized that money is simply another tool, nothing more special than an accepted medium that has no real value in itself other than its utility in exchanging things that do have recognized value.

Modern Monetary Theory can, obviously, be very useful when applied to Keynesian strategies. Do we need to create and rebuild our infrastructure? The short answer, by the way, is yes. And the answer also could be MMT, which would allow the federal government to spend vast amounts of money and to create millions of well-paying jobs building and rebuilding roads, bridges, housing … whatever. Just as obviously, MMT can also be used in a monetarist manner, allowing government to expand the supply of money without any concern whatsoever regarding what the private sector will do with it.

We have recently seen examples of what MMT can look like. The U.S. war in Iraq was financed “off the books” in an effort by the administration of George W. Bush to pay for the war without exploding the national deficit. They would not have admitted it, but this was an example of pseudo-MMT combined with military Keynesianism, with the caveat that the money was, in the end, borrowed; later the total cost was quietly folded into the national debt. As the Iraq war continued the world economy was devastated by the 2007 collapse of the mortgage finance bubble. One of the methods used to pull us out of the resulting Great Recession was something called “quantitative easing”: Essentially, the Federal Reserve created trillions of dollars out of nothing and used it to buy much of the bad debt held by large banks. This was MMT in the service of monetarism shoring up the financial sector—not to create new jobs or build infrastructure, but to maintain the jobs and institutions that were already there and which were threatened with collapse. The Fed’s massive expenditures made their way into the economy without adding to the national debt.

There is now an active constituency on the political left promoting the use of MMT to stimulate the economy, specifically to expand government employment and build infrastructure and perhaps to create a minimum guaranteed income. These are certainly noble goals and tempting strategies. The trouble with such ideas has little to do with the policies that have been proposed so far. The real problem is demonstrated by the two examples we have seen already, the Iraq War and the Fed bailout. The real danger, in fact, is that once you open up MMT for progressive efforts, you also open it up for all of the other possibilities that are much less constructive and much less positive; for waging massively expensive and unnecessary wars, for saving corporate CEOs from the consequences of their risk-seeking behaviors, for subsidies and tax cuts and “no-bid” contracts for favored corporations and industries and oligarchs, for the perpetrators of, rather than the victims of, the failures of capitalism. In our current system, the uses of MMT will most likely be monetarist rather then Keynesian, and the beneficiaries of the ability of government to create unlimited MMT currency will be the same wealthy oligarchy that now benefits from our current deficit-funded largesse, but with many fewer controls or limits. We need those limits.