Sunday, February 01, 2009

Everything Old Is New Again — Part I

One of the more entertaining dance routines in the annals of film history was enacted exactly 30 years ago in the movie “All That Jazz” (it can be viewed on YouTube here). The music accompanying the performance was a song titled “Everything Old is New Again,” a fitting description of the current economic policies resurrected from the past, some already enacted, others being considered, all relating to today’s economic downturn. In fact, one line in the song provides a most appropriate point of quite relevant sage advice: “…don’t throw the past away, you might need it some day.” Well, no one can dispute the fact that the “some day” is here again.

Which reminds us of another “again” song, written some 80 years ago, sharply different in tone, citing what turned out to be a totally misguided upbeat title, “Happy Days are Here Again.” The timing could not have been worse; the song was published one month after the “Crash of 1929.” The uplifted sentiments were not wasted however, since in 1932 that song was used as the campaign melody for Franklin D. Roosevelt’s successful presidential run, and it ultimately became the theme song of the Democratic Party.

When trying to relate past events to the present, one of the most quoted aphorisms of all time, presented by the legendary philosopher George Santayana, comes to mind: “Those who cannot remember the past are doomed to repeat it.” It’s amazing how often that principle has been violated in the over 100 years since it was first formulated, and how well it has withstood the test of time. Also amazing is the repetitive nature of the past. Consider the following quote and the remarkable, almost eerie relevance to what has been determined as one of the fundamental causes of our current economic crisis: “Some of our banks have shown themselves either incompetent or dishonest in their handling of the people’s funds. They had used money entrusted to them in speculative situations and made unwise loans.” No! Those are not words spoken by Presidents Bush or Obama, although they could have been. This criticism from the past was part of the very first “Fireside Chat” given by President Roosevelt on March 12 th, 1932, almost 77 years ago. Not only was Santayana right, we could also certainly say, “Everything old is new again.”

We Are All Keynesians Now

It was during the period of Roosevelt’s presidency that the British economist, John Maynard Keynes, began to reach the pinnacle of his fame. Keynes is still considered by many to be the most influential economist of the 20 th century (perhaps the third most prominent economist of all time). With the prospects of the worst economic conditions since the Great Depression facing us, there is a resurgence and reactivation of Keynes’ economic theories. Politicians and academics of all stripes have become, or are becoming Keynesians, if not in name, in action. If the implementation of his polices are successful Keynes may yet go down in history as the most influential of the 21 st century as well, but more on that later.

That Keynes led a diversified career would be an understatement. Born in 1883, he was educated at Eton and Cambridge. During various periods of his life he was a British civil servant, a Cambridge don, chairman of a life assurance society, editor of several journals, a director of the Bank of England, and was knighted by the then King of England. He was also a speculator, a farmer, a prolific writer of manuals and books, and the head of the British Arts Council. He was a leader of the famous Bloomsbury Group consisting of avant-garde writers and painters known as the “Intellectual aristocracy.” In fact, Bertrand Russell, the Nobel Prize winning philosopher and mathematician (no intellectual slouch himself) named Keynes as the most intelligent person he had ever met. Based on his investment acumen Keynes amassed a substantial private fortune. His art collection, one of the largest private collections of 20 th century art, included a great number of impressionist artists. Early on he had several homosexual relationships, but in keeping with his “diversity” in his 40’s he married a well-known Russian ballerina some 15 years younger than himself.

His original claim to fame developed with his appointment as a delegate to the Paris peace conference of 1918-1919 at the end of World War I. He was violently opposed to the harsh reparations imposed on Germany by the Allies, and resigned from the delegation. In 1919 his first book, The Consequences of Peace was published outlining his prophecy that the reparations were so large they would insure the ruin of the German economy and ultimately lead to further conflict in Europe. The book not only sold well, it caused a great deal of soul searching and made Keynes an instant celebrity.

However, his final reputation resulted from his economic theories and the success generated as these theories were implemented. In 1936 these principles were outlined in a book titled The General Theory of Employment, Interest, and Money. (These were the precepts that formed the basis for my own undergraduate degree in Economics). At the time, Keynes was so sure of his theories that while writing the book he wrote to George Bernard Shaw, “I believe myself to be writing a book on economic theory which will largely revolutionize, not I suppose at once, but in the course of the next ten years –– the way the world thinks about economic problems.” That statement could not have been more prescient. With this book Keynes not only revolutionized the field of economics, but established theories that dominated the field over the next four decades. Here is a shortened version of his theories:

“The key to a successful economic climate is to maintain a constantly high level of what he called “aggregate demand”. To him that meant the total of all demand in the economy –– demand for consumption and for investment for both private and public purposes. His inescapable conclusion was that if private demand should flag and falter, then it had to be revived and stimulated by the only force strong enough to lift consumption: the government.

The pre-Keynesian classic economists had thought of the government too. But almost all of them had contended that, in times of depression the government should raise taxes and reduce spending in order to balance the budget. In the early 1930’s [in the midst of a world-wide depression] Keynes cried out that the only way to revive aggregate demand was for the government to cut taxes, reduce interest rates, spend heavily –– and deficits be damned.”

I warned you “Everything old is new again.” The above explanation of Keynesian Economics is a quote from –– believe it or not –– the December 31 st, 1965 issue of TIME magazine. The magazine cover of that issue pictured John Maynard Keynes (right).

The cover story title in that TIME magazine issue was “We Are All Keynesians Now.” That was a quote within the article from the famous economist Milton Friedman who originally was a strong advocate of Keynesian Economics, but later in his career stressed the advantage of the marketplace and the disadvantage of government intervention and regulation. In fact, it was Friedman who subsequently helped to popularize the concepts of “Supply Side” or “Trickle Down” Economics that President George H. W. Bush once called “Voodoo Economics.”

That theory, embraced by Ronald Reagan as well as by George W. Bush, was a throwback to early 20 th century “Classsic” economics, demanding that the government should not interfere with the “Free Market,” but should radically cut taxes even on the rich, and maintain a balanced budget. (Ironically, both Reagan and Bush spent the budget into deep deficits, thereby emulating Keynesian principles). This theory was the direct opposite of Keynesian Economics that while favoring lower taxes, especially during economic slowdowns such as those we now face, also encouraged massive deficit spending efforts on those problematic occasions in order to stimulate the economy. (President Obama is obviously a convert).

The actual thrust of the TIME magazine story described the remarkable growth of the U.S. economy in the previous quarter century (1940-1965), a growth pattern that TIME attributed to Keynes and to the implementation of his theories. The TIME magazine article opened with this quote from Keynes: “The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist.” While Keynes has been dead for some 63 years, his principles are hardly defunct –– they are more alive today than they have been for the past 35 years. That will be explained in next month’s article as will Keynes’ relationship with President Roosevelt.


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