John Maynard Keynes often stressed the importance of investment and consumption in stimulating an economy to produce an appropriate supply of jobs. He also less frequently explained how austerity as a policy followed by governments could be very damaging to the public good. He put the argument this way in Chicago in the Halley Stewart Lecture of 1931. It should be compulsory reading for policy makers.
I have spoken of competitive economy campaigns and competitive contractions of new development. …An economy campaign, in my opinion, is a beggar-my neighbour enterprise, just as much as competitive tariffs or competitive wage reductions, which are perhaps more obviously of this description. for one man’s expenditure is another man’s income. Thus whenever we refrain from expenditure, whilst we undoubtedly increase our own margin we diminish that of someone else; and if the practice is universally followed, everyone will be worse off. An individual may be forced by his private circumstances to curtail his normal expenditures, and no one can blame him. But let no one suppose that he is performing a public duty in behaving in such a way. An individual or an institution or a public body, which voluntarily and unnecessarily curtails or postpones expenditure which is admittedly useful, is performing an anti-social act…. (pp.74-75; Halley Stewart lecture, 1931 The World’s Economic Crisis and the Way of Escape, London:George Allen & Unwin )
I am Professor of political economy at Concordia university in Montréal, Québec, Canada. I received my B.A.Hons (econ.&poli sci) from the University of Manitoba. I also completed my M.A. degree in economics there. Went on to spend two years at the London School of Economics as a Ph.D. student in economics and then completed my Ph.D. in political economy at the University of Toronto. Was named a John W.Dafoe fellow, a CMHC fellow and a Canada Council fellow. I also was named a Woodrow Wilson fellow in 1968 after completing my first class honours undergraduate degree. Worked as an economist in the area of education, labour economics and as the senior economist with the Manitoba Housing and Renewal Corporation for the Government of Manitoba from 1972 to 1978. I also have worked as an economic consultant for MDT socio-economic consultants and have been consulted on urban planning, health policy, linguistic duality and public sector finance questions by the governments of Manitoba, Saskatchewan,the cities of Regina and Saskatoon, Ontario and the Federal government of Canada. I have also been consulted by senior leaders of the British Labour party, MPs from the Progressive Conservative party, the Liberal party and the New Democrats on economic policy questions. Members of the Government of France under the Presidency of Francois Mitterand discussed my work on public sector deficits. I have also run for elected office at the municipal level. I first began to write about quantitative easing as a useful policy option during the early 1980s.
This entry was posted in austerity
and tagged J.M.Keynes
. Bookmark the permalink
The problem with Keynes’ comment is that there is an assumption that there is a reasonable global equilibrium between production and consumption. The challenge of current economic meltdown is that hyper competitiveness has resulted in increased mechanization in an effort to cut cost. This means that increased production does not necessarily mean equal level of increase in employment, which means reduced consumption. The level of support that the government can provide is limited in that with lack of employment means reduced government tax income. Borrowing to increase consumption will only lead to increased in debt for corporations would not be able to act as sufficient tax based to repay the debt and the interest that is accruing on it. As well, corporations would be seeking tax havens and tax breaks, which further limits government’s ability to increase taxes at the risk of having the industry relocate elsewhere thus eroding country’s employment.
As industries continue to mechanize, the uneducated and under-educated population based in general will be forced to reduce their consumption due to their limited employability and earnings. Even well educated people are facing difficulties responding to global competition – both due to lower costs elsewhere and increased mechanization of part of their work/business. This leaves the bulk of massive and frivolous consumption to the wealthy.
The other problem with consumption and investment is that consumption is immediate and short-terms (which can only be support if the government has a reasonable war chest of funds or short terms low interest borrowing it can work with) and the investment is long term. Governments that have limited ability to borrow cannot support consumption and, even those that can borrow, can pursue this route for only a short time before the government will face unmanageable debt burden. Given that as industries revives, they mechanize more, hire less people, and hire people with high skill set, it displaces many unskilled and manual labour.
The investment, being long term, there is no guarantee that the investment will bear fruit. Miscalculation on investment can result in wasted resources. How many people have invested in education expecting to get a job only to find out that their skill set is not desired.
I rather think the economic challenges we are faced with today demand some serious modification to Keynes theory quoted above to better reflect the dynamics of politico-economic environment.
The global imbalance between production and consumption needs to be corrected through economic stimulus and exchange rate adjustment.Countries like China need to spend their trade surpluses partly in their trading partners’ economies.
Technological unemployment and globalization are clearly factors in the contemporary world that have affected the rate of unemployment. but this does not mean that insufficient aggregate demand is not a bigger factor in the current situation.The rate of unemployment can be decomposed into inadequate aggregate demand unemployment which is the bulk of the unemployment and structural unemployment of the type you are describing.If properly treated by stimulus the government would reduce American unemployment over several years by a number of percentage points to about 5 %, roughly the rate of unemployment that prevailed before the crash and bursting housing bubble of 2007-8. The same sort of technological factors and globalization prevailed in 2007 as now, but unemployment was 5 % and even below. Below this level there may well be technological factors and globalized outsourcing that make it difficult to reduce unemployment to 3 % but remember that when the U.S. was in the midst of a high employment boom and the Fed accommodated the boom with low interest rates unemployment fell to 3.9 %. So while I accept that technological unemployment complicates the problem it does not mean that Keynesian stimulus will not work
.As I have explained many times in my blog and in my published works deficit hysteria exaggerates the supposed burden of public debt. The debt to GDP ratio in the U.S. currently is 62 %. It was almost double that level in 1946 when the U.S. was one third its current population and had a much lower GDP per capita. Governments that issue public debt in times of high unemployment and a business cycle recession are acting wisely to sustain aggregate demand and help reverse a downturn. It is a necessary policy because if they do not act so they will face a prolonged slump that can last for many years. Consumption and investment are the principal components of aggregate demand. Along with the difference between exports and imports and government expenditures they account for the total expenditure in an economy. Savings can only occur once expenditures have taken place and income has been received. Despite the lamentations of the bond market about the size of government debt where is the first place that stock market and bond market investors flee to to seek safety in a time of crisis…U.S. treasuries thats where.Government debt of countries like the U.S., Canada,Germany, Japan and Great Britain is a preferred and valuable asset.
Investment in education on the whole is a very wise investment that over ones lifetime returns a positive rate of return both in real monetary and psychic terms. The reason we have had in Canada, the U.S and other advanced countries excessive numbers of young people with good educations underemployed or unemployed is because we have wrongly tolerated too high a rate of unemployment and preferred policies that addressed inflation rather than unemployment
.But I grant you there needs to be better planning with respect to helping young people choose their career path and get the best from their educational choices.
Once the economy is on a more certain path toward lower unemployment then it is time to debate technological unemployment, better rules for trade and outsourcing under conditions of globalization and an ILO agreement on a global minimum wage set in accordance with the real GDP per capita of each country.
Thank you for your thoughtful comment.
Pingback: Michael Hoexter: Deficit Hawks (Obama, Romney, Bowles, Boehner) Plan to Shrink YOUR Economy – Part 2 « naked capitalism