The answer to the Covid economic crisis
One of the most peculiar aspects of the current debate in the US Congress on the big expenditure bills, and last month’s budget presentation before the British parliament, as the country struggles from the economic fallout from Brexit and the Pandemic, is that rarely has there been mention of the name John Maynard Keynes.
Keynes, without doubt, was the greatest economist of the last century. What Keynes taught was counterintuitive- that in a time of an economic downturn the answer was to prime the pump. Spend more. (The opposite of what a family should do when in debt.) That would revive an economy and increase the growth rate. The increased growth would provide more tax revenue which could be spent on aid for the poor, new infrastructure and the health services etc.. As an economy grows the deficits many politicians say they worry about (although the Republicans only do when they are out of power) would become relatively smaller. In short, the debt would remain a constant figure while the size of the economy as a whole would increase. In other words, the total debt possessed by a country, relative to a country’s growing total income, would lessen. The percentage of debt would go down. Indeed, with interest rates as low as they are these days, it costs a government very little to borrow. As some economists have said it’s almost “free money”. Keynesian economics, intellectually derided by the Chicago school, in particular by the Nobel prize winning economist, Milton Friedman, and politically rubbished by Margaret Thatcher and Ronald Reagan, needs a comeback.
President Joseph Biden obviously believes in it, judging by his actions, but he needs to publicly credit and explain Keynes to a wide audience. Keynes’s principles of finance and economics are not hard to understand. Then it will be easier to carry doubters along. Even more so with Prime Minister Boris Johnson. The new UK budget seems orientated the Keynesian way, but he could go much further, not least in lowering taxes. In Germany, Keynes has long been relegated to a footnote in the economic debate. Until very recently, Chancellor Angela Merkel has believed in balancing the books. The result has been a brake on both German and European growth and, in the case of Greece, an imposed austerity leading to a contraction that ruined the lives of millions of Greeks. Somewhat of a surprise, earlier this year, Merkel changed course under the pressure of the deflationary Pandemic which has pulled every country down and agreed to the European Union setting up a massive fund of 540 billion euros to help the poorer European nations recover. Very Keynesian.
Anti-Keynesianism persists, not only in the current American Congressional debate. One saw it in the Conservative governments in Britain of David Cameron and Theresa May which implanted many savage cuts that hurt the poor most. Over many years, the International Monetary Fund (IMF) insisted on monetary belt-tightening in Thailand, Malaysia, Indonesia, South Korea and much of Africa and Latin America. The result were cuts in social security and a rise in poverty. (And the IMF has shied away from criticising military expenditures, thus allowing governments to focus their cost-cutting on social expenditures whose greatest impact is as always to hurt the less fortunate.)
These, important errors though they be, are perhaps lesser flaws compared with the refusal to open the door to a wider implementation of Keynesian teaching on the need for greater liquidity resources for the IMF.
If the IMF had had the resources Keynes envisioned, (called by economists “liquidity”), argued my friend, the late Mahbub ul Haq, the former finance minister of Pakistan and a constant campaigner for resuscitating Keynes’ intellectual legacy “then the Asian crisis would have been avoided”. He was referring to the great Asian crisis of 1997, which raised fears of a worldwide economic meltdown due to financial contagion.
Just before the end of the Second World War the Western powers decided to rethink the international financial system. Meeting in July 1944 at Bretton Woods their top experts, including Keynes, representing the British government, discussed a new world order, convinced that the global system could not be left to the mercy of unilateral action by governments or to the unregulated workings of the international markets. Thus emerged the IMF and the World Bank. It was at the one and the same time a great achievement and a great disappointment. Over the last eight decades both institutions have been invaluable, but this success only begs the question what they might have done if Keynes’s original vision had not been cut down to size.
Keynes proposed an IMF whose resources would be equal to one half of world imports. In practice the IMF today controls liquidity equal to only a very small proportion of world imports. It can impose only a modicum of the financial discipline necessary in an age when the size of speculative private capital movements crossing international borders is mind-blowing.
Keynes saw the IMF evolving into a world central bank, able to issue its own reserve currency, sufficient to meet the needs for expansion whenever and wherever needed. The IMF can issue so-called Special Drawing Rights, a minor but important step towards achieving this- they amount to a very small percentage of world liquidity. These SDRs can be exchanged for other currencies that in turn can be used to buy goods and services such as vaccines, medical equipment and food.
In the mid-1990s, the IMF’s managing director, Michel Camdessus, campaigned hard for a modest increase in these and also for an increase in quotas to strengthen the IMF’s capital base, but the US, the UK and Germany rebuffed him. In recent years because of the financial crisis of a decade ago and the current Pandemic, even some conservatives have come round to using SDRs- but with the proviso that the rich countries get them as well as the poorer nations. In fact, they do get the most, automatically- how much depending on the size of their IMF quota. SDRs were issued earlier this year, a total, equivalent to 650 billion US dollars.
Keynes regarded balance of payments surpluses as a vice and deficits as a virtue. It is deficits that sustain demand and generate increased employment. He went so far as to argue that outstanding trade surpluses should be penalised by an interest rate of 1% a month. Thus, in Keynes’s vision, there would be no persistent debt problems as surpluses would be used by the IMF to finance deficits.
Keynes would have had no time for the present gamblers’ paradise- private investors’ speedy entry into and exit from financial markets in search of quick gains. This has not only helped precipitate a crisis every decade or so, but it has also seriously undermined longer-term investment. In an age when the combined reserves of all central banks amount to one day’s worth of foreign exchange trading, the ability of individual countries and the IMF to stop a quite irrational haemorrhaging of the proportions we have just witnessed is totally undermined.
Besides more available public liquidity we are in urgent need of some sort of braking system when the private liquidity system spins too fast. Hence the renewed interest in academic circles of the proposal of the economics Nobel prize winner- and fan of Keynes- James Tobin of Yale University, for a tax of 0.5% on international currency transactions. This would curb excessive speculation, while yielding around $1.5 trillion a year for health and educational development.
So, who among the current policymakers will dare resurrect the name of John Maynard Keynes and preach his word? “Ring out the false, ring in the true”!