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Keynes' idea may rescue U.S. economy

December 27, 2008|By ALLAN POWELL

Perhaps a more appropriate description for the sudden reappearance of Keynesian economic proposals could be "recycled" rather than "resurrected." But, since first used during the New Deal, several presidents have been advised to rely on John Maynard Keynes' thinking to get a sluggish economy back on track. In two letters, one written in 1933 and the other in 1934 to President Roosevelt, this gifted British economist suggested what could be done to help the United States master a deepening depression.

Each time this happens, I get the sensation that I am meeting an old acquaintance. My fascination with the ideas of Keynes began in 1950 when my advisor for a master's thesis suggested that Keynes would make an interesting study, although at the time, he was relatively unknown in America. It seemed the better part of wisdom to give due respect to the suggestions of one's thesis adviser and, as it turned out, it was a good choice.

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According to Keynes, when there is a steady decline in the marketplace and unemployment is rising to an unacceptable level, the government must attempt to restore purchasing power by creating make-work projects to improve the nation's infrastructure.

No less than $400 million should be injected each month into the ailing economy to provide employment. Bridges, dams, roads, parks and public buildings would be repaired or built to provide the jobless with earned income rather than dependence on a dole. These projects would require lumber, cement, tools and machinery that would energize the market.

Workers would purchase groceries such as canned tomatoes or peaches. The grocer would replace this inventory from the wholesaler, who would in turn, reorder from the cannery. The farmer would then get orders from the cannery.

It should be noted that the idea behind this was to stimulate the economy from the bottom up. It is, therefore, understandable that those who are convinced that money should "trickle down" are not fans of Keynes.

What is surprising about recent commentary is that one of Keynes' major ideas - the multiplier effect - is mentioned, but not usually explained. It is, however, useful in understanding why economists would recognize its potential.

When the government dispersed the monthly thrusts of $400 million into the economy, it should expect a stimulus effect by a multiplier of at least three times that amount. This is because all of the amounts transferred from spender to spender must be added until the total amount of each initial input works its way through the system.

It must be candidly admitted that, even with the heroic measures of President Roosevelt, unemployment was still at 17 percent in 1938 after reaching a high of 25 percent in 1933. It is generally accepted that World War II provided the stimulus to bring about a dramatic reduction in unemployment.

One must confess surprise to be told that President Bush claimed to be a "Keynesian," when he presented tax cuts totaling $1.6 trillion during his first term in office. The basis of his claim was that he, too, was stimulating a slowed economy. This is easily recognized as a stretch, since an analysis of these cuts is clear evidence of "trickle down" thinking.

The main beneficiaries of the Bush tax cuts were those at the top of the economic pyramid - not the laborers on make-work projects. Citizens For Tax Justice, for example, determined that in the 2001 tax cuts, the top 1 percent of tax payers earned 19.2 percent of pre-tax income and paid 26.3 percent of all federal taxes. They were granted 37.6 percent of the total tax cuts.

A rather interesting feature of the current call for a "Keynesian" approach is that it did not surface early when the housing, banking, or insurance segments showed signs of a collapse. Rather, the calls came when the automobile industry signaled its critical financial situation. Perhaps it was the number of laborers in factories that would significantly swell the unemployment lines that prompted emphasis on a Keynesian solution.

Keynes does not have the esteem in America that he enjoys in England. We seem to hold our noses when we borrow his recommendations. He was knighted in England and is now referred to as "Lord" Keynes. This lends support to the notion that contributing good ideas is more important than being popular.

Allan Powell is a professor emeritus at Hagerstown Community College who writes for The Herald-Mail.

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