‘We Are All Keynesians Now’Milton Freedman, Time, 1965 President Obama’s approach to economic recovery has now been defined by the Senate’s passage of a $780 billion economic recovery-stimulus package (albeit with $110 billion slashed from the House version), called the American Recovery and Reinvestment Act 2009. The Act is a paradigm shift from the conservative-era, supply-side approach to tax, regulation and spending offered by Presidents Reagan, Bush Sr and Bush Jr. Obama argues that supply-side policies are at the very root of our current economic crisis.
The Senate’s approval of a three-quarter trillion-dollar government social and infrastructure spending package has ushered in a new era of economic thinking, namely, Obama-nomics. In other words, using governmental deficit spending as a cure for the current economic recession (and threatened depression).
I, the author of this column, must admit to not being an economist. Nevertheless, it is indisputable that Obama’s economic recovery proposals are based firmly upon those of the celebrated British economist John Maynard Keynes, author of The General Theory of Employment, Interest and Money (1936). Keynes offered his economic theory when the world, including the United States, was in the seventh year of the Great Depression. Keynes took an alternative stance to that of the neo-classical economist theorists of his day, who believed in the self-correcting properties of the marketplace, whereby recovery would take place in the absence of intervention, and in its own good time.
We must remember that 1930s economists’ views about private, free-market capitalism were not as optimistic as those of the experts who control much of today’s popular thinking. When Keynes was writing, critics of the free-market economy maintained that nothing could be done to counter-act economic depressions. Keynes theory offered the hope that fiscal policy, similar to Obama’s recovery plans, would control business cycle down-turns and the resulting unemployment.
In layman’s terms, the objective of Keynesian policy is to achieve full employment. This is to be done by increasing cumulative effective demand, through what Keynes described as “inducement to invest” (rate of investment). Commentators maintain that Keynes’ solution to economic depression was to achieve full-employment though some combination of two approaches, namely, low interest rates and government investment in infrastructure. Thereby, investment stimulus increases income, which results in more spending, production and investment, and triggers a cascade of events whose total increase in economic activity is a multiple of the original investment.
Whilst Republicans and Democrats currently agree on the immediate cause of our current economic ills, they differ in their explanations for it. Republicans blame ‘liberal’, big-government-subsidized homeowner-mortgage programs (‘sub-prime’ loans), which have enabled unsuitable consumers to become homeowners with mortgages they can no longer afford to pay. The consequent widespread home foreclosures have damaged the lending banks’ balance sheets, creating a depressive ripple effect throughout the entire economy. By contrast, Democrats place the blame on Republican-era banking deregulation, which incentivized banks to promote these risky, sub-prime loans, luring unsuspecting homebuyers, who now can no longer afford their own high mortgage payments.
Regardless of the explanation, however, the Obama Administration is attempting to convince Congress, as a part of the recovery-stimulus package, to approve nearly $300 billion in infrastructure spending, broadly defined. The Administration decided to address the banking industry’s mortgage-foreclosure problem with expected new rules governing the remaining allocation of $350 Billion in Troubled Asset Relief Program (TARP) bank bail-out funds.
Unfortunately, a very recent report by the American Society of Civil Engineers estimates that nearly $2.2 trillion is required to bring US roads, levees, hazardous waste, schools, inland waterways, dams, transit, aviation, wastewater, drinking water and energy, all of which the report assigns a near-failing “D” grade, up to acceptable levels. Hence both the Obama Administration and Congress will have to figure out how to finance the remaining balance-gap necessary to repair ailing infrastructure. This will require additional financial initiatives, which will arguably, in their turn, stimulate further job creation.
The high price-tag of infrastructure development should encourage innovative financing mechanisms that will serve as a catalyst to encourage substantial investment from non-governmental capital pools (public and private employee pension funds, for example) in infrastructure. For example, the Federal Government could subsidize interest rates to make state and local infrastructure bonds competitive with corporate bonds.
Ironically, Milton Freedman’s famous adage in Time magazine that ‘we are all Keynesians now’ was made in response to tax cuts, and not infrastructure investment, enacted under former President Lyndon Johnson in 1965. Similarly, President Obama, in his effort to win a few Republican votes for his recovery-stimulus package, also uses tax cutting incentives, which in fact account for nearly 40% of the monies provided for by the proposed Recovery Act.
Obama-nomics is not based on a trendy, supply-side, tax-cutting flavor-of-the-month. Instead, President Obama has decided to base his economic recovery policies on the seminal theories of Britain’s John Maynard Keynes. Let us hope that President Obama’s plan to increase investment in our crumbling infrastructure works to achieve the economic recovery and resulting new jobs that his policies are intended to produce.
(Dr. William K. Barth was awarded his doctorate in philosophy from the University of Oxford in the United Kingdom. His doctoral thesis, entitled On Cultural Rights: The Equality of Nations and the Minority Legal Tradition, was published recently by Martinus Nijhoff).
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