I read an article in the Financial Times earlier this week (September 23, 2023) -…
Progressives who comment on macroeconomic matters invariably invoke the ghost of John Maynard Keynes as a motivating influence presumably because the popular perception – albeit shallow – is that Keynes supported generalised fiscal expansion in times of high unemployment. A striking example of this “association” is the recent Australian Fabian Society essay (April 11, 2011) by the Australian Treasurer Wayne Swan – Keynesians in the recovery.
The essay spawned several media articles – for example – this Sydney Morning Herald article (April 13, 2011) by economics writer Jessica Irvine – Swan proved Keynes works but can he avoid Keynes’s curse?; this News Limited article by its senior economics editor Michael Stutchbury (April 12, 2011) – We don’t have a budget to manage boom; and a reply to the last article by the Treasurer himself (April 14, 2011) – Fiscal policy is setting us apart.
None of these article represented the situation accurately.
Irvine misses the point completely in her critique of the Swan dissertation. She tries to claim that it was the influence of Treasury not the long-Keynesian pedigree of Labor (which she challenges) that led to the introduction in late 2008 of the:
… Keynesian, counter-cyclical stimulus spending package.
But what if the stimulus wasn’t of the type Keynes would approve? No comment from Irvine who like Swan misrepresents the history of economics.
Further misrepresenting history (and context), Irvine says:
Keynes once argued that governments could bury dollar bills in bottles and employ people to dig them up and it would still be worth it to stimulate the economy.
She wanted to make the point that people who benefit from the employment would be happy but the “Australia’s experience shows clearly that … many more would complain loudly about the terrible waste of money”.
First, what experience clearly shows that? What robust research underpins that conclusion? The constant repetition of the conservative press that government spending is waste of money is not “Australia’s experience”. But that is not the main issue.
Second, why do journalists take historical statements out of context.
Go back to the J.M. Keynes’ The General Theory of Employment, Interest, and Money (published in 1936). Many mainstream economics characterise the Keynesian position on the use of public works as an expansionary employment measure as advocating useless work – digging holes and filling them up again. The critics focus on the seeming futility of that work to denigrate it and rarely examine the flow of funds and impacts on aggregate demand. They know that people will instinctively recoil from the idea if the nonsensical nature of the work is emphasised.
The critics actually fail in their stylisations of what Keynes actually said. They also fail to understand the nature of the policy recommendations that Keynes was advocating.
What Keynes demonstrated was that when private demand fails during a recession and the private sector will not buy any more goods and services, then government spending interventions were necessary. He said that while hiring people to dig holes only to fill them up again would work to stimulate demand, there were much more creative and useful things that the government could do.
Keynes maintained that in a crisis caused by inadequate private willingness or ability to buy goods and services, it was the role of government to generate demand. But, he argued, merely hiring people to dig holes, while better than nothing, is not a reasonable way to do it.
In Chapter 16 of The General Theory of Employment, Interest, and Money, Keynes wrote, in the book’s typically impenetrable style:
If – for whatever reason – the rate of interest cannot fall as fast as the marginal efficiency of capital would fall with a rate of accumulation corresponding to what the community would choose to save at a rate of interest equal to the marginal efficiency of capital in conditions of full employment, then even a diversion of the desire to hold wealth towards assets, which will in fact yield no economic fruits whatever, will increase economic well-being. In so far as millionaires find their satisfaction in building mighty mansions to contain their bodies when alive and pyramids to shelter them after death, or, repenting of their sins, erect cathedrals and endow monasteries or foreign missions, the day when abundance of capital will interfere with abundance of output may be postponed. “To dig holes in the ground,” paid for out of savings, will increase, not only employment, but the real national dividend of useful goods and services. It is not reasonable, however, that a sensible community should be content to remain dependent on such fortuitous and often wasteful mitigations when once we understand the influences upon which effective demand depends.
The message is clear. Keynes clearly understands that digging holes will stimulate aggregate demand when private investment has fallen but not increase “the real national dividend of useful goods and services”.
He also notes that once the public realise how employment is determined and the role that government can play in times of crisis they would expect government to use their net spending wisely to create useful outcomes.
Earlier, in Chapter 10 of the General Theory you read the following:
If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coalmines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again (the right to do so being obtained, of course, by tendering for leases of the note-bearing territory), there need be no more unemployment and, with the help of the repercussions, the real income of the community, and its capital wealth also, would probably become a good deal greater than it actually is. It would, indeed, be more sensible to build houses and the like; but if there are political and practical difficulties in the way of this, the above would be better than nothing.
Again a similar theme. The government can stimulate demand in a number of ways when private spending collapses. But they should choose ways that will yield more “sensible” products such as housing. He notes too that politics might intervene in doing what is best. When that happens the sub-optimal but effective outcome would be suitable.
So trying to represent the position of Keynes on fiscal expansion by this oft-quoted claim about digging holes and burying money is very poor journalism.
The context clearly showed that Keynes didn’t advocate that at all and had greater faith in the ingenuity of policy makers to come up with better uses of idle labour in public sector employment programs.
Stutchbury in the Murdoch rag – The Australian – has a different agenda in attacking Swan. Apart from clangers like “(in) just about every rich country, the global financial crisis has morphed not into the triumph of Keynesian economics but into the fiscal crisis of the modern welfare state” Stutchbury’s agenda is to malign the effectiveness of the significant (and early) fiscal stimulus in Australia.
He wants to claim that it was China that saved Australia. I wonder how that happened given that net exports were seriously undermining economic growth during the downturn and the mining sector contracted dramatically. It is a curious argument that the historical revisionists are making about the mining industry in Australia. Apparently it is our saviour. It is too small to save a nation. But moreover how can a contracting industry add to growth?
There are all sorts of myths propagated in this article – the fears that structural deficits will ruin us – and that unless we run very large federal surpluses – the mining boom will ruin us – and the normal things that neo-liberal columnists attempt to scare their readers with.
But Stutchbury also fails to challenge Swan’s main contention that the Labor fiscal stimulus was Keynesian. For example, he says:
Swan validly argues that, if Keynesian fiscal policy pumps up the budget when the economy slumps, then Keynesian policy has to cut it back when the economy booms.
So apparently what the Australian government did was to run a Keynesian fiscal policy but is just not providing certainty in the retrenchment of that policy.
But there is no challenge to the notion that the fiscal stimulus was faithful to Keynes. So bastardised has history become in this context that we now no longer bother to represent things accurately.
And now we consider what Swan himself said in his Australian Fabian essay – Keynesians in the recovery. The one thing I will say that is positive about the essay is that it represents an attempt – misguided notwithstanding – by the Government to explain within some argued conceptual framework why they are pursuing budget surpluses and the fast deficit retrenchment in our history.
I think elevating the discussion above the daily political mantras that the politicians engage in (a la the recent speech by the Prime Minister) so that we can contest ideas rather than slogans is a positive and welcome step.
Beyond that there is no much that I can say that is positive about this essay. It is a neo-liberal tract – disguised by its self-association to a progressive icon (although whether Keynes was a progressive is another debate which I am not adding to here). The fact is that Swan obviously wants to pin his flag to the “Keynes mast” because he wants to massage what is clearly neo-liberal policy development as being in some way progressive and therefore true to the roots of the Labor Party.
In that way, we are meant to conclude that: (a) the economic policy is reasonable and truly progressive; and (b) the Labor Party is progressive and reasonable and acting faithfully in relation to its roots.
Neither conclusions are remotely true.
The economic policy regime being followed is irresponsible and inspired by the worst concepts coming out of mainstream economics (crowding out, quantity theory of money, the NAIRU, etc).
The Labor Party is not progressive and it has lost touch with its roots.
Please read yesterday’s blog – Australian Labor Government abandons its roots and this blog – Australia – communists driving prosperity, while the neo-liberals squander it – for more background.
Early in his 8-page essay, Swan says:
… since we first put together the stimulus package, I have adopted this motto: if we are going to be Keynesians in the downturn, we have to be Keynesians on the way up again. That means a speedy return to surplus.
As I travel around the country, I’m often asked why our commitment to rapidly return the budget to surplus is so important. In this essay I want to explain how one of the 20th Century’s great thinkers, John Maynard Keynes, helped us find the answer, in the process influencing the Government’s response to both the global downturn and our strategy. (emphasis in the original)
Note the gratuituous reference to “speedy” quite apart from the basic claim about surpluses.
But the association with Keynes himself is clear. I make that point because what became known as Keynesian was a bastardised version of the General Theory that even Keynes disliked. Please read my blog – Those bad Keynesians are to blame – for more discussion on this point.
Swan then describes why Labor introduced the fiscal stimulus packages – to avoid “the destruction of jobs and small businesses and the erosion of capital”.
Swan recounted that:
In 2008 the world grappled with a synchronised downturn unlike anything we had seen in 75 years. The banking system was under threat, asset prices dived, global trade plummeted, firms stopped producing, households stopped spending, investment almost dried up, and business confidence took a blow from which it is still recovering … It is too easy to forget just how exposed Australia was to the crisis.
So action was necessary and because the Australian government “not hampered by the gold standard, by the lack of access to international
capital that restrained public and private borrowing and investment, nor by a weak central banking system” it was able to avoid the problems that beset governments trying to deal with the Great Depression.
That is, the Australian government was running a fiat monetary system with flexible exchange rates and it was fully sovereign as the monopoly issuer of the Australian dollar. As such it had the means via fiscal policy to redress any private spending collapse. The facts tell us that it redressed – some – of the collapse but still allowed unemployment and underemployment to rise sharply.
Swan then further articulated the motivation of the Government:
Underpinning our policy response were the principles of fiscal and monetary action to boost aggregate demand set out by Keynes in his General Theory and his activist publications of the Great Depression era: immediate stimulus measures to boost consumer spending and confidence; useful public works to create employment; lower interest rates to boost investment and spending; and concerted international action to strengthen the world financial system.
The Australian government did provide significant fiscal intervention and did introduce a major public works program. As Swan notes:
In February 2009 the Government began implementing a $42 billion Nation Building and Jobs Plan to support jobs and invest in future long-term economic growth. It included investments in major infrastructure such as roads, rail, ports, freight facilities, clean energy initiatives, the National Broadband Network, and school, university and hospital infrastructure. Some $16.2 billion of this investment was for the Building the Education Revolution program, which funded building and maintenance works across nearly 24,000 projects.
All admirable projects but very generalised and not particularly jobs-rich (see more on this soon).
The facts are that Keynes did not advocate generalised fiscal expansion. He judged fiscal policy initiatives by their impact on employment and advocated targetted “employment rich” fiscal interventions.
So when I talk about the role of fiscal policy being to “close the spending gap” implicit in this recommendation is the need to achieve and then sustain full employment.
I don’t really want to get into a “what did Keynes really mean” type of dialogue. But the facts are fairly clear in this area. It is not reasonable to simplify Keynes’ policy towards combatting a spending collapse as being generalised expansion and public works.
In 1937, Keynes wrote a series of articles in The Times which argued that the government had to “retard certain types of investment” even though unemployment was still over 1.5 million in the UK.
In an article that traces Keynes attitude to fiscal expansion, G.C. Peden (1980) ‘Keynes, The Treasury and Unemployment in the Later Nineteen-Thirties’, Oxford Economic Papers, 32(1) notes that:
Keynes advised against a general stimulus to the economy when unemployment was still over 10 per cent …
The reason? He was worried about “a risk of what might fairly be called inflation”.
In one of articles in The Times (January 12, 1937) Keynes wrote:
I believe that we are approaching … the point where there is not much advantage in applying a further general stimulus at the centre … the evidence grows that … the economic structure is unfortunately rigid, and that (for example) building activity in the home counties is less effective than one might have hoped in decreasing unemployment in the distressed areas.
This signified that by early 1937, Keynes was thinking about economic policy in a more targetted way with respect to job creation. His emphasis at that time focused on, what Peden terms “ad hoc measures in areas of high unemployment”.
In his March 11, 1937 article in The Times, Keynes “urged defence departments should place all possible orders in the Special Areas” (these being the distressed areas of high unemployment.
Keynes also wrote in 1937 that “we are in more need today of a rightly distributed demand than of a greater aggregate demand”. So targetted job creation strategies. This was considered in 1936 by the Department of Labour which Peden notes “identified three ways in which this might be done” … which included the famous quote from Cabinet Paper – “Defense Programmes-Labor Issues Involved”, Cabinet Paper No. 57, February 1936:
Another possibility which may have to be considered, if the shortage is acute enough, is taking the contract to the men rather than the men to the contract. I mean by this that it may be necessary to consider using up pockets of older skilled men who cannot be moved, in their home districts.
So the Australian government’s nationwide school building program (which was indiscriminate) and its home insulation program (also largely indiscriminate) were the ways they conceived their public works intervention. Despite all the criticism of these programs I applauded them because they provided some support to aggregate demand.
But they were not jobs rich. Please read my blog – 90,000 jobs for 42 billion is a bad strategy … – for more discussion on why I considered this a poorly designed macroeconomic intervention.
The simple point – the fiscal injection was not jobs rich – that is, it was not targetted to areas of distress as recommended by Keynes.
I also liked this Counterpunch article (April 13, 2011) by Alan Nasser – The Kind of Stimulus We Need – Putting People to Work which examines the different conceptions of fiscal interventions.
You might find this article by Pavlina Tcherneva – Keynes’s Approach to Full Employment: Aggregate or Targeted Demand? – interesting. I did.
The problem is not merely the size of the stimulus. The kind of stimulus adopted can make all the difference. Indeed, the kind of fiscal stimulus is what is at issue. This is overlooked by those who see that the impotence of monetary policy justifies the promotion of a fiscal alternative. But it’s not enough to know that. For there are two kinds of fiscal stimulus corresponding to two possible policy goals. One has been demonstrated to work. The other has not fared so well.
Nasser says that Keynes was “unambiguous as to the principal effective means of accomplishing this goal: direct government job creation through public works projects”.
He criticises the Obama stimulus for the same reasons I criticised the Swan Australian stimulus – it was not jobs rich in the tradition of Keynes.
This is why I advocate a Job Guarantee – which represents the minimum fiscal intervention required to achieve a “loose” full employment. It is regionally targetted by definition and the policy limits are automatically defined without guesswork from the government – the last person who walks through the JG door ready to work is the size of the fiscal stimulus necessary to provide the requisite work.
Given it is non-inflationary (government buys “off the bottom” – that is, hires labour that has a zero market bid – which means no other employer requires their services at that time), it also allows government to craft further more general stimulus measures which do not compromise the initial task – to generate enough jobs for all those who want them.
Please read my blogs under this – search string – for more discussion on this point.
As to whether Keynes supported the “balanced budgets over the cycle” goals of the current Australian government which is leading them to pursue large surpluses by 2012-13, that is another blog. But what Keynes would not have supported was leaving 12 per cent of your available labour resources idle and 25 per cent of your youth labour force idle while pursuing budget surpluses.
That is what this Government is claiming is a progressive position. The way they are justifying this claim is by appealing to the myth that this level of labour underutilisation corresponds with a modern definition of full employment and so the Government has accomplished Keynes’ goals.
Nothing could be further from the truth. I did an interview today for ABC News Radio morning show on this topic and pointed out that it is obvious there is a huge jobs (and hours of work) shortage in Australia at present which accounts for the huge pool of idle labour. Targetted job creation policies are required and the scale of the problem is so large that deficits should be on-going. I will make the interview available when a link is posted by the ABC.
Trying to claim legitimacy as a progressive by misrepresenting Keynes is about as bad as being neo-liberal and trying to pretend you are progressive.
The Saturday Quiz will be back sometime tomorrow – 04.00 to be exact!
That is enough for today!