Time to Re-read Keynes

The hue and cry over deficits cannot sidetrack us from our true goals of full employment and sustainable energy.

“Now that the immediate crisis has passed,” Policy Network asks for “long-term strategies to shape our post-recession economies” and “to promote economic growth.”

But the immediate crisis hasn’t passed.  It is not over for the jobless.  It is not over for those losing their homes.  It is not over for Greece, Spain, Portugal, or Iceland, facing ruin in the capital markets.

Europe has no plan for jobs. In America, President Obama has recently sent a jobs program and a call for investments in transportation, clean energy, and education – to a stalemated Congress. No country has a credible plan for effective homeowner debt relief. To the plight of their own periphery, the countries of the European center appear to respond with folded arms.

The right goal is not to shape “post-recession growth.” Growth is not assured. It cannot be assumed. And it is not even the highest priority. The right task is to find a fair, effective, and sustainable path out of crisis.

People need work.  We face the challenge of climate change. This challenge must be met while also improving the quality of life, or it can never be met at all.  The broad outline of a program is therefore plain.  There is no mystery about it. In 1929, Keynes wrote, “there is work to do; there are men to do it. Why not bring them together?”  Today as then, it is that simple.

Do we need to “rethink the relation between the market and the state”?  A futile hope!  Those who once thought that the market could flourish without the state have either already “rethought,” or they cannot think. They are our own Stanley Baldwins and when they discourse on this subject, “it not only is nonsense...but it looks like nonsense to any simpleminded person who considers it with a fresh, unprejudiced mind.”

In the crisis, the financial sector collapsed. It hasn’t recovered. The big banks remain open, but they make few new loans, take practically no commercial risks, and their old customers – households without wealth, businesses with out hope -- make no effort to obtain credit.  In this situation, the state must act. It can act through the banking system by mandate, as it does in China and as it used to do in Japan and France. Or it can bypass the banks and go to work directly -- as it did in America in the New Deal and as Keynes proposed for Britain in 1929.

A jobs program?  Keynes again: “No, says Mr Baldwin. There are mysterious, unintelligible reasons of high finance and economic theory why this is impossible.  It would be most rash.  It would probably ruin the country.  Abra would rise, cadabra would fall...No, cries Mr Baldwin.  It would be most unjust....  Unemployment is the lot of man... For the more the fewer, the higher the less.”

The question facing world leaders today is not what to do.  It is whether to do it. There are two goals to meet: full employment and sustainable energy. That’s technically complex. But the complexities are complexities of engineering, organization and politics.  They are not complexities of economics or finance.

The question is posed as though it involved deep questions and high obstacles, whose true nature the uninitiated cannot be expected to grasp. Thus the hue and cry over public debt and deficits – projected to be unsustainable... for reasons never stated... in the long run. Our papers and our television speak of almost nothing else. But if they are right – as all the voices of Wall Street and the City say – then how come the long-term interest rate on the government bonds of the rich countries remains so low?  In the United States, the federal government can borrow for 20 years at less than 4.4 percent. And it can borrow short term for practically nothing.

In truth, the deficit/debt uproar is a deliberate effort to sidetrack attention, to defeat the will of the electorates in the United States, as well as Greece among others, who stubbornly insist on effective action, economic recovery and financial reform. Those behind the uproar never foresaw the financial crisis. They never warned against the dangers of excessive private debt.  Their interest is plain: they profit from private debts! So it pays to make believe that private is productive and public is sterile, that private is stable and public is not, when the reality is the other way around.

A final word from Keynes: “It may seem very wise to sit back and wag the head. But while we wait, the unused labor of the workless is not piling up to our credit in a bank, ready to be used at some later time.  It is running irrevocably to waste; it is irretrievably lost.  Every puff of Mr Baldwin’s pipe costs us thousands of pounds.”


James K. Galbraith holds the Lloyd M. Bentsen, Jr. chair in government/business relations at the Lyndon B. Johnson School of public affairs, The University of Texas at Austin, and is a senior scholar at the Levy Economics Institute