How would Keynes advise Obama on jobs?

By Nicholas Wapshott
September 8, 2011

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.

9 comments

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Regarding tax cuts….in the ’60s, both personal and corporate taxes took a much bigger bite. Considering that and the present enormous consumer debt overhang, it’s a little hard to believe that tax cuts today would lead to anything like the kind of demand increase they did then, and they would be terribly difficult to reverse later. In fact, the Norquist/Tea Party insurgents would likely use the lower revenue to force further spending cuts.

Posted by TheCageNovel | Report as abusive

Be bold. Do what the Republicans say. This is the author’s idea of being bold? Rick Perry says government spending does not create even one job so that makes a public works program a non-starter? Perry also doesn’t believe in evolution so, by the author’s logic, evolution is not true.

Obama needs to be bold and call out the Republicans ignorance on economic matters and apply all three of the Keynesian approaches: low interest rates, tax cuts, AND public works spending. Now is not the time to worry about the deficit.

Posted by JWilliams320 | Report as abusive

Keynesianism/Central Economic Planning and the Federal Reserve are to blame for the economic crisis. Remember Nixon… “we’re all Keynesians now.” Well, we are all Keynesians and we’re broke, don’t produce enough, and are the edge of a total collapse of the economy. The government cannot spend our way out of this problem. Even if the government increased spending, surpassing the amount in all the stimulus/bailouts, and it put money in the hands of the people and they spend it; that still wouldn’t work. If the government spends money when it has no money to spend (we are in debt and broke) then the Federal Reserve will create the money needed through various actions. The result will be an even more weak/devalued dollar. So what if we start handing out money; when the money isn’t worth anything it won’t matter. It’s very sad that the government as a whole doesn’t really show signs of changing our bad Keynes/Central Economic Planning. They shows signs of wanting to continue the same actions that they have been taking and then they will once again be surprised that what they are doing is still not working. Of course, many in government will say, just as Keynes would suggest that they just didn’t do/spend enough. So round and round we go… doing the same thing and expecting results. The best thing government can do at this point is JUST STOP. We don’t want your help. Cut taxes, end our unsustainable foreign military presence around the world, and leave us the hell alone!!

Posted by EyesofVigilance | Report as abusive

I like the government and trust it to do what is good for the country, at least for the majority of it.

Posted by Inquisiturient | Report as abusive

Beware the spurious argument that the stimulus was not enough – 1 Trillion dollars is not enough?

What then constitutes ‘enough’: 5 trillion, 10 trillion, why not given every person in the US a million dollars each. That should rev up the economy.

The fact is that Keynesian economic has been tested and found wanting. WWII, not Keynes, pulled the world out of the Great Depression, but clever fools (someone who lacks common sense) keep banging the stimulus drum.

Fiscal rectitude and governmental expense controls will go a long way to send the message that the US is serious about financial reform – and globally business and the markets will respond accordingly.

Posted by eleno | Report as abusive

Keynes’ theory is dead in case the government has NO money to stimulate. It has been proven by Japan and now by the USA.
What on earth is one thinking when overspending THREE year in a row an average of 10 % of GDP per year !? Does one have no shame, no self-discipline ? It is ruining the USA into debt.

Trust, I repeat TRUST in a decent government would have helped the US economy a lot more than this sword of Damocles hanging above this government going to default!

Posted by FBreughel1 | Report as abusive

The problem with Keynesian theory is the greedy politicians have used it as a crutch in both good times and bad. When times are good, they bring home the pork to build a bunch of unneeded bike paths and convention centers all around their communities, and then when times are bad they want to build even more bike paths and convention centers under the misguided perception that seeding the local economies with borrowed tax dollars will somehow magically create wealth and make life rosy.

Who benefits from Keynesian spending? Thuggish public employee unions, crony construction contractors, and holders of tax free muni bonds. Not many others. Certainly not those who pay taxes.
I know. I live in a state that is littered with empty convention centers and unused bike paths. We also have a tunnel under our state capital that cost $18BN to build and is of such poor quality that it’s leaking and falling apart three years after opening. Our problem in Massachusetts is that working taxpayers are vacating the state. State party leaders (all Democrats) keep praying that “Keynesian” style block grants from the Fed will pay their bondholders and keep all the party hacks safely ensconced in their phony baloney government jobs.
It’s bad theory from the start. Why? Because those who command the checkbook are not acting in the best interests of the economy or their constituents. Public officials cannot be trusted to do anything properly.

Posted by Poeboy | Report as abusive

“WWII, not Keynes, pulled the world out of the Great Depression, but clever fools (someone who lacks common sense) keep banging the stimulus drum.”

Common sense would tell you that WWII spending was, in fact, MASSIVE federal stimulus spending. Keynesian efforts were helping some in the late 1930′s, but it simply wasn’t enough. Once the war started the US Government dramatically increased its spending efforts which lead to the dramatic economic turnaround. Who did you think was paying for all those tanks and bombs??

Of course that was back when Americans were actually willing to sacrifice a little for the sake of country by accepting federally imposed rations (What would now be called Socialism) and buying war bonds (What would now be called wasteful liberal spending).

Posted by Externalities | Report as abusive

“Keynesianism/Central Economic Planning and the Federal Reserve are to blame for the economic crisis. ” – EyesofVigilance

Really, because I thought Supply-Side Economics had been pretty much dominating Washington for the past 30 years? You remember, Voo-Doo economics. That’s where everything gets deregulated (like banks, OTC trading, derivatives markets, etc) and corporation get huge tax breaks so they can more easily hire and produce. Then, the rewards were supposed to rain down on the middle-class and poor. A trickle down effect as some would say.

What has the REAL outcome been?? Three near collapses of financial markets in less than 25 years due to unregulated greed (Saving & Loan, Long-Term Capital, and the TARP bailout). Of course all three collapses were avoided thanks to massive tax payer bailout programs. Oh, and let’s not forget stagnate wage growth for the middle and lower classes.

Posted by Externalities | Report as abusive