Econ 101

John Maynard Keynes

When I took my undergraduate degree in Economics (at a very conservative, private, Midwestern college, let it be said), John Maynard Keynes held a place in the economic canon comparable to the place held in physics by Einstein. His General Theory of Employment, Interest, and Money ruled political policymaking after WWII and provided 3 decades of prosperity until the late 70s, when something called stagflation came along, a period of high unemployment combined with inflation.  This was a situation Keynes had not addressed in his masterwork, so it was decided that he was not perfectly omniscient after all, and therefore must be passé and irrelevant.  We would have to go back to Adam Smith and the perfectly self-correcting free market.  There had always been a group of people who longed to do this, because it is so much more comforting to believe that the economy is self-correcting and you don’t need to do anything at all.  Besides, lurking within the General Theory was the troublesome element of uncertainty, and it was such a relief to do away with that.  Thus was the mantle of economic deity handed to Milton Friedman, who provided an explanation of stagflation.  I can recall having a job interview in the early 90s wherein I was asked how it felt to have the Keynesian economics I learned in school invalidated.  I laughed and replied that tales of Keynes demise were highly exaggerated.   I didn’t get the job. 

In the wake of the global financial meltdown of 2007-09, Bush, Obama, Sarkozy, and Brown abruptly decided that maybe markets weren’t perfectly self-correcting after all, and perhaps we shouldn’t just let events take their natural course and see what happened.  Keynes might still have some shred of relevance.  Tax-relief and spending initiatives were launched to stimulate growth.  They weren’t really adequate (less that 2% of GDP a year for 3 years), but they did pull the economy out of a nosedive.  Yet, much as happened in 1931, these measures led to a panic about deficits that produced calls for debt reduction and austerity.  In 1931 Keynes warned that these spending cuts would turn the economy downward again, and, indeed, the depression deepened.  Yet here we are 80 years later making the same mistake all over again.  A couple of months ago Rick Perry said that “Keynesian theory is now done.”  That’s like Rick Perry announcing the end of General Relativity.  I suspect his knowledge of the one is equivalent to his knowledge of the other.

Keynes mission during the Great Depression was to save capitalism from itself, and it requires his services again.  Events of the past 5 years have demonstrated yet again the accuracy of his models, and discredited free market theories.  One has to suspect that even congressional Republicans see this, and are only determined to block Obama’s attempt at a second stimulus because they see it as in their political interest to insure that the economy is as bad as possible for the 2012 election.  Whether they are doing it out of ignorance, stupidity, or selfish political motives, if they are successful in blocking any stimulus, the United States will be condemned to a decade of stagnation, joblessness, and declining living standards.  And the Republicans will have performed a great service for all those who wish our country ill.