Richard Posner, Keynesian

Richard Posner has an interesting essay on John Maynard Keynes in The New Republic.  I’m still trying to untangle all the various ideas and contradictions implicit in this economic downturn.  There are many competing visions which all have merit.  That the stimulus and bailouts seem to have helped, I think is true, but what and who they have helped is another question.  Whether they will do much for working (or unemployed) Americans is harder to say.

Consumer debt is high, and with plummeting home values, rising unemployment, and falling wages, the road to recovery is hardly obvious.  We may be in something of a balance-sheet recession, but I think it goes beyond that, and it’s made all the worse by the housing burst.  As consumer spending continues to fall – due both to people hoarding over uncertainty, to lost equity, and to people paying down personal debt – so does employment.  As employment falls uncertainty rises, consumer spending drops off, and we find ourselves in a spiral.  Decreased spending leads to higher unemployment leads to decreased spending and so on and so forth.  Furloughs and wage cuts force people to limit spending, which leads to more furloughs, more wage cuts, and increased unemployment.  It goes on and on.

At this point, Keynes would argue that the government should intervene – that it should replace consumer spending with government spending in order to keep employment numbers high.  When the spiral is ended, and spending and employment have returned to normal levels then the government will have served its purpose.  Business as usual can resume.

As Posner writes:

An ambitious public-works program can be a confidence builder. It shows that government means (to help) business. “The return of confidence,” Keynes explains, “is the aspect of the slump which bankers and businessmen have been right in emphasizing, and which the economists who have put their faith in a ‘purely monetary’ remedy have underestimated.”

Of course, there is the question of revenue:

But for a confidence-building public-works program to be effective in arresting an economic collapse, the government must be able to finance its increased spending by means that do not reduce private spending commensurately. If it finances the program by taxation, it will be draining cash from the economy at the same time that it is injecting cash into it. But if it borrows to finance the program (deficit spending), or finances it with new money created by the Federal Reserve, the costs may be deferred until the economy is well on the way to recovery and can afford to pay them without endangering economic stability. When investors passively save rather than actively invest, government can borrow their savings (as by selling them government bonds) and use the money for active investment. That is the essential Keynesian prescription for fighting depressions.

Now all of this makes sense to me, though I worry about two points.  First, it is very difficult to scale back government spending once the floodgates are open.  Government, like any other enterprise, is loathe to scale back for both good and bad reasons.  It’s one thing for the state to step in to keep employment numbers afloat (though our current stimulus doesn’t seem to be doing that) and quite another for the government to indefinitely replace consumer spending with public spending.

At some point deficit spending is unsustainable, and so higher taxes are required – which has a negative “draining” effect on the economy.  (I’m not against returning tax rates to the very reasonable rates of the late 90’s, but there is always the temptation to just keep raising taxes to keep up with increased spending.  At a certain point tax increases will harm productivity which will, ironically, cause revenues to fall.)  Add to this all the other government efforts, from two wars to health care reform to efforts to save the world from global warming, and it’s increasingly tricky to see how we can sustain any government financed recovery short of outright plunder.

I’m not sure if public works are the best stimulus either.  Certainly they can be excellent job creators over the long haul.  An ambitious high-speed rail or interstate project, for instance, would create many jobs but would not do so quickly.  The bonus to the infrastructure and to long-term employment would be tangible, but in the immediate do very little.  Direct payouts to consumers might make more sense – though if we are indeed in a balance sheet recession, that money would likely be spent on paying down debts rather than buying more stuff – which isn’t a bad thing, but isn’t particularly stimulating either.

In any case, to put it all bluntly, I remain somewhat agnostic on the stimulus, on the proper path forward, and on many of these big economic questions.  I’m trying to frame this through Bastiat’s broken window, but the “seen” and “unseen” remain elusive.  Absolutists on both sides of the aisle harangue us with empty words and hollow ideological arguments – either too confident in the abilities of government to save us, or too utterly certain that it is government itself at the root of the mess.  To be perfectly frank, I’m just not sure.  I imagine there’s some truth in all these claims.

And now for some South Park to help frame the debate.  The whole episode can be seen at South Park Studios.  The last bit (not shown below) has Kyle taking a fairly straightforward approach to consumer debt – a sort of jubilee, if you will.