How would Keynes advise Obama on jobs?
By Nicholas Wapshott
The opinions expressed are his own.
It’s still the economy, stupid. So if Obama wants to keep his job – and we must assume he does, though he doesn’t seem to be enjoying himself much — he must boost the economy and get the jobless back to work. No president since 1948 has been elected with a jobless figure higher than 7.2 per cent, so with unemployment currently running at 9.1 per cent, he looks headed for certain defeat.
Add the pivotal fact that two of his core groups of supporters, blacks and hispanics, suffer disproportionately from joblessness, at 16.2 per cent and 11.6 per cent respectively, and the president’s prospects look even dimmer. With the White House admitting there is little chance unemployment will fall before the election next year, the president needs some good advice on how to get people back to work, and fast.
What would John Maynard Keynes tell Obama? He once advised Franklin Roosevelt on how to cure unemployment, but he didn’t make much headway. “I saw your friend Keynes,” FDR told his Labor Secretary Frances Perkins. “He left a whole rigmarole of figures.” In turn, Keynes told Perkins he had “supposed the president was more literate, economically speaking.”
Keynes won’t find Obama knows much about economics either, but the founder of macroeconomics was a great charmer and would applaud the president for heading in the right direction with his 2009 stimulus. He would temper his praise, however, by saying the trillion dollar injection into the economy was far too small to do much good and in many cases went to the wrong people and was spent on the wrong projects.
To get a domestic benefit from a public spending boost, the president needed to funnel money towards Americans who would pass it on, not give it to the wealthy, who stashed it away or bought themselves foreign-made luxuries, nor those who used it to pay off their credit card bills. Keynes’s famous “multiplier,” by which every dollar spent is worth far more as it is passed from hand to hand, doesn’t work if the cash is placed under a mattress.
So what should the president do next, now that he lost the mid-terms and finds himself confronting a hostile Congress dominated by a vociferous minority who will not countenance raising taxes or adding to the national debt? Keynes would remind Obama that there are three ways to pump money into an ailing economy to bolster demand and fuel the spending that businesses need to invest and expand.
The first is to ensure money is cheap. The Federal Reserve has gone a long way to ensuring this for the foreseeable future. For his trouble, Fed chairman Ben Bernanke has found himself besmirched by the leading Republican presidential hopeful Rick Perry as “traitorous” and “treacherous” and threatened with being “treated pretty ugly” if he ever steps foot in Texas. No matter, Keynes would say, easy money is not useful if no one is lending. As he put it, “You cannot push on a string.”
The second way of floating the economy is to fund public works. Heaven knows, America could do with better infrastructure. Bridges are falling down, electric plants are outdated, railroads are antediluvian. But there is not much chance that the ossified Congress will approve spending on public projects, so that is a non-starter. In last night’s GOP candidates’ debate, Perry summed up the general Republican attitude when he declared, “[Obama] has proven for once and for all that government spending will not create one job. Keynesian policy and Keynesian theory is now done.”
But Perry did not take into account the third way Keynes said cash can be funneled into a failing economy: cutting taxes. It is a misconception about Keynes found on both sides of the political aisle that he was somehow only in favor of raising taxes. In fact the Sage of King’s suggested that only when everyone was employed and an economy was booming should taxes should be raised to pay off the borrowing taken at the bottom of the business cycle. He also advocated tax cuts – big tax cuts – when an economy is moribund. The first president to follow Keynes’s lead by cutting taxes was John F. Kennedy in a measure implemented by Lyndon Johnson: to almost everyone’s surprise, tax revenues rose.
So Keynes would say to Obama: be bold. Take the fight deep into the heart of your opponents’ camp and propose massive tax cuts, both personal and corporate. Americans will use the windfall to start spending again. Small businesses will expand at a faster rate and will start hiring again. Big businesses will take heart at the prospect of more customers and will also take on labor.
Federal revenues will slump and the deficit will soar, but what is there to lose? If, as in Britain, you slash spending and raise taxes, you will only invite a double dip recession. If you cure the economy and put everyone back to work, there will be plenty of time to raise taxes later, when the going is good. Above all, you will radically change the terms of the political debate. And it will put the Republicans and the Tea Party in disarray, divided between those who want big tax cuts and those who want to pay off debt. If the president wants a second term, Keynes would argue, he has to be daring. Now is not the time, as Margaret Thatcher said to one-term president George H. W. Bush, “to go wobbly.”
Nicholas Wapshott’s Keynes Hayek: The Clash That Defined Modern Economics is published by W. W. Norton next month. To read an extract, click here.