Monday, May 18, 2009

J.M. Keynes and Your Wallet

The British economist John Maynard Keynes had a tremendous influence during the first half of the twentieth century, and even today his ideas are embraced by some leaders, in the U.S.A. and elsewhere. Keynes made the bold assertion that in was not only acceptable, but even good, for a government to intervene in an otherwise free market. He thus worked against the "classical liberalism" of Adam Smith and John Locke, who emphasized an individual's right to make decisions. A government can set prices for buying and selling, and decide how much you will earn at your job. Keynes wrote that it was more important for a government to control the entire economy (in order to ensure that it was running smoothly) than it was for each person to have choice; stated differently, Keynes felt that collective economic security was more important than individual human freedom.

Keynes himself did not enthusiastically embrace the idea of deficit spending, accumulating into governmental debt, but many of his followers interpreted his theories in a way which did exactly that. Most notably, President Franklin Roosevelt understood (or misunderstood) Keynesian economics to give permission for the massive debt and deficits of the New Deal programs. Roosevelt's justification was encapsulated in the slogan "we owe it to ourselves." It may be trouble if one individual gets into massive debt (say, by buying a large house or a fancy car), but if a nation signs itself into debt, that's fine, because we borrow the money "from ourselves" (from banks, or from individuals who purchase government bonds), and we owe it "to ourselves", and so, Roosevelt argued, we could continue borrowing huge amounts indefinitely, and never even really intend to pay it all back, as long we made small regular payments. This is the advent of "structural debt": debt as a standing part of the budget, rather than a one-time debt which one plans to pay off.

Whether or not FDR's massive debts helped the American economy remains a matter of dispute: many economists write that it was the large-scale factory activity of WWII which actually re-started the economic and nudged it toward prosperity.

The Roosevelt version of Keynesian economics governed much economic thought until the difficulties of the mid 1970's, when various economists and politicians questioned the wisdom of amassing a huge national debt. Since that time, there has been much discussion about how to reduce both annual deficits and the larger accumulated debt.

One of several objections to such standing debts is summarized in the phrase "generational theft": if a group of national leaders, the youngest of whom is perhaps in her or his late 40's, and the majority of whom are in their 50's or 60's, create, for example, a fifty-trillion-dollar national debt, it is clear that they will, given their life expectancies, have no part in paying this debt. It will be left to the next several generations of Americans, people who are now fifteen or twenty years old, to pay the bill. Hence, one generation is literally robbing another.