Pharos-Tribune

June 5, 2012

Economy calls for raising Keynes

by Dave Kitchell

— If the financial collapse of 2008 served any purpose other than to depress the value of our retirement funds, it made people like me read those overly optimistic reports on mutual funds more closely than before.

These glossy reports investment companies are required to publish for our consumption is not exactly like reading your favorite book or magazine.

One monolithic report I read last week did offer something different: A quote from famous English economist John Maynard Keynes. The man known most for supply side economics was once quoted about an economic period that was less than robust, but nearing the tipping point for strong recovery and growth. Of course, one of my mutual fund managers used that quote to draw a comparison to the current economy. Point made.

Keynes, who died in 1946, was popularized in the 1960s. Keynes believed that too much personal saving could stifle economic growth because it would tie up capital. He believed that government couldn’t be entirely laissez-faire and let economic growth take care of itself without intervention. He believed that from time to time, wealth had to be redistributed and that giving capital to the poor would stimulate the economy because the poor are more likely to spend money than save it.

I’m not an economic scholar, but I would say if Keynes were alive today, he’d be saying the times have changed, but the reasons for his economic theories haven’t. We may not be saving as much personally as we did in the 1960s, but companies are actually saving more, and the balance sheets show it. The time for wealth redistribution may be at hand because the gap between the rich and poor has grown, and the 99 percent movement is what that theory is all about. As for government intervention, that’s already happened.

GM and Chrysler have been bailed out, and dozens of banks have either been shut down or recapitalized by the federal government.

Perhaps the thing Keynes believed in more than anything is that consumption, not savings, causes growth. There are many ways to promote consumption. Expanding the population by letting more people into the country is one way. Giving tax cuts to put more money in the economy is another. Holding down inflation and importing cheap goods from other countries is another. We’ve been there and done that.

What we haven’t been able to do is raise incomes across the board so that more people can retire early and spend their golden years spending money. We haven’t been able to pay women the same salaries their male counterparts are making, and so they have to work longer to earn their keep. By being cheaper alternatives to men, pay inequality indirectly becomes an issue for men as well. We haven’t been able to save enough money to put our children through college because student loans in this country now outpace credit card debt for the first time.

These are interesting times when it comes to pay. CEOs are making obscene millions because they can produce, but some of the best employees that have ever been on assembly lines are laid off or let go because they are simply too expensive for companies to keep.

On the surface, it’s about competition between businesses domestically or internationally. But under the surface, it’s really a competition between the workers of the 1960s when Keynes’ philosophy was embraced and the 21st century when it’s virtually been forgotten.

Consumption? Consumer confidence is down again, and employers only created 69,000 jobs last month while the country geared up for the summer months when employers are traditionally eager to higher cheap, seasonal labor to help out those struggling high school and college students.

In 1996, former Federal Reserve Board Chair Alan Greenspan spoke of something called “irrational exuberance” several pages into a speech he gave at a black-tie dinner. Within hours, markets all over the world dropped and the words were forever associated with him.

Today, the real irrational exuberance we have is political, not economic. We just don’t have the will or popular support to do what we have to do to drive the consumption Keynes described as the salvo for growth.

Instead, we’re sitting back and being patient. We’re happy to have “rational exuberance,” which is to say that over time, unemployment is gradually dropping, the economy is growing, factory orders are up and so are profits.

And as the Europe Keynes once knew before there was a Euro or even Great Britain in the Common Market teeters on the brink of economic default, it may be time to raise Keynes on both sides of the Atlantic and think about the possibility that we’re too consumed with the wrong things that aren’t serving to grow any country’s economy much at all.

• Dave Kitchell is a columnist for the Pharos-Tribune. He can be reached through the newspaper at ptnews@pharostribune.com.