Martin Wolf Puts It Better than Anyone Else I Have Seen

Martin Wolf on our current magneto trouble:

FT.com / Columnists / Martin Wolf - Keynes offers us the best way to think about the financial crisis: We are all Keynesians now. When Barack Obama takes office he will propose a gigantic fiscal stimulus package. Such packages are being offered by many other governments. Even Germany is being dragged, kicking and screaming, into this race.

The ghost of John Maynard Keynes, the father of macroeconomics, has returned.... Like all prophets, Keynes offered ambiguous lessons to his followers. Few still believe in the fiscal fine-tuning that his disciples propounded in the decades after the second world war. But nobody believes in the monetary targeting proposed by his celebrated intellectual adversary, Milton Friedman.... Now... it is easier for us to understand what remains relevant in his teaching....

Minsky... we should not take the pretensions of financiers seriously. “A sound banker, alas, is not one who foresees danger and avoids it, but one who, when he is ruined, is ruined in a conventional way along with his fellows, so that no one can really blame him.” Not for him, then, was the notion of “efficient markets”....

[T]he economy cannot be analysed in the same way as an individual business. For an individual company, it makes sense to cut costs. If the world tries to do so, it will merely shrink demand....

The third and most important lesson is that one should not treat the economy as a morality tale. In the 1930s, two opposing ideological visions were on offer: the Austrian; and the socialist. The Austrians – Ludwig von Mises and Friedrich von Hayek – argued that a purging of the excesses of the 1920s was required. Socialists argued that socialism needed to replace failed capitalism, outright. These views were grounded in alternative secular religions.... Keynes’s genius – a very English one – was to insist we should approach an economic system not as a morality play but as a technical challenge. He wished to preserve as much liberty as possible, while recognising that the minimum state was unacceptable to a democratic society with an urbanised economy. He wished to preserve a market economy, without believing that laisser faire makes everything for the best in the best of all possible worlds.

This same moralistic debate is with us, once again. Contemporary “liquidationists” insist that a collapse would lead to rebirth of a purified economy. Their leftwing opponents argue that the era of markets is over. And even I wish to see the punishment of financial alchemists who claimed that ever more debt turns economic lead into gold. Yet Keynes would have insisted that such approaches are foolish. Markets are neither infallible nor dispensable.... [T]he task for this new administration is to lead the US and the world towards a pragmatic resolution of the global economic crisis we all now confront....

The shorter-term challenge is to sustain aggregate demand, as Keynes would have recommended.... [T]he load will fall on the US, largely because the Europeans, Japanese and even the Chinese are too inert, too complacent, or too weak.... [T]his period of high government spending is, alas, likely to last for years....

No less pragmatic must be the attempt to construct a new system of global financial regulation and an approach to monetary policy that curbs credit booms and asset bubbles. As Minsky made clear, no permanent answer exists. But recognition of the systemic frailty of a complex financial system would be a good start.

As was the case in the 1930s, we also have a choice: it is to deal with these challenges co-operatively and pragmatically or let ideological blinkers and selfishness obstruct us...

Comments

[bakho]

The net effect of the New Deal policies was a transfer of wealth from those who were hoarding to those who had too little or none at all. Hoarders only loan on conditions favorable to them based on ability to repay (or collateral).

Since in a depression, high unemployment depresses wages and leaves too many with the inability to repay, credit is reduced. Only by transfer of wealth from the hoarders to spenders will the economy revive.

Wealth transfer can be done in a way that expands the economic pie. This minimizes the loss to the wealthy and better positions the economy for recovery. The wealthy will make their money back once the economy recovers.

While WWII gets a lot of credit for ending the depression, not enough credit is given to the GI Bill. Millions of former soldiers could have been just dumped on the agricultural economy which had undergone mechanization and huge increases of productivity and job loss. Instead, the US government passed the GI Bill and on top of that expanding spending on education and expanded the college system. This was a massive job training/ retraining program to prepared a workforce to move into new enterprises that pushed our economy forward.

The LBJ war on poverty that included Medicare and improved housing for millions of Americans was another large wealth transfer program.

Since 1970, very few new wealth transfer programs have been created. EITC is one of the few. It is time for the next round.

[mark kaufmann]

You are quit right about the GI bill. The economy post WWII would have fallen staight back to pre war levels, but for the GI bill, the extension of tours of duty as occupation forces instead of coming home, and no stigma to women who left the workforce and went on Aid for families with dependant children (eliminated under Clinton's welfair reform). Combine these large scale manipulations of the workforce with huge goverment expenditures---Marshal Plan for example, and the goverment giving war enterprises to private industry. Huge expendetures on education and housing coupled with growing levels of unionization ultimately created our post war middle class.

[Mr. Todd]

keynes weighs in...

http://mrbloggington.blogspot.com/2009/01/guest-blogger-john-maynard-keynes.html

[Stephen Myles St. George]

One of Keynesianism's nasty after effects of the economic stupor of the late 60's and 70's. The dependence on fiscal policy, with the attendant negligence of monetary policy, created a situation where essentially nothing was going right in the US economy.

And whoever wants to praise unions ought to drive an American car made in the late 70's or 80's. If the car had a weird smell, most likely you would find some UAW worker's ham sandwich under the seat; if something consistent shook when you were driving the car, most likely you would find an empty Pepsi can in the door.

[kharris]

Will Keynes now be the long dead economist in whose thrall we unwittingly labor? Friedman had the advantage of being alive for the period of his intellectual rule, but then, so did Keynes for the first round. If Keynes wins out over Friedman now, won't Friedman win out over Keynes in some future round? Or have we reached the "end of economic thralldom", recognizing our intellectual masters clearly?

[Steve]

kharris... On the one side we have the true believer Friedman, on the other, the more pragmatic Keynes.

I can see how commitment to Friedman is representative of "economic thralldom," but I don't see a commitment to pragmatism as even close to the same thing.