A world in economic crisis

What would J.M. Keynes recommend?

Posted in Australian Reserve Bank, Cap and Tax, stagflation by Aussie on August 4, 2011

I am posing this question, not because I consider J.M.Keynes to have had the answers, but because the alleged followers of Keynes are not paying attention to what Keynes actually wrote!!

First of all, it is necessary to be very clear that the application of Keynesian theory had failed by the late 1960s. I have always maintained that the Keynsian solutions for unemployment were only useful in the short term, not the long term and I look to the way in which Australia applied the levers to the economy prior to the election of Gough Whitlam in 1972. The pattern prior to 1972 was: inflation, credit squeeze and stable employment. The goal had been full employment and for the most part after the second world war the Australian economy had been relatively stable.  Then the electorate, who had no idea about a number of issues that had torn the ALP apart in the 1950s decided that there was a need for a change. What a mistake.

Second, my theory is that when government takes “initiative” and “stimulates” the economy when it is not necessary, this actually has an adverse affect on the private sector. In the long term the result of such measures in inevitably the drying up of available investment dollars for the private sector. When investment dollars for the private sector dries up, this ultimately leads to an increase in unemployment, but at the same time it also leads to a lack of consumer confidence because workers begin to fear losing their jobs.  Ultimately the lack of consumer confidence leads to a lack of spending for goods and services, which then leads to the necessity of more lay-offs, thus increasing the number of unemployed.

Third, individuals who claim to be Keynesians, such as Dick Krugman, do not in fact expound Keynesian theory. Instead what they offer is like a Prius – it is hybrid Keynes, with a large dollop of Marxism added into the mix. Keynes actually wrote that he thought that his theory worked best in a Communist style economy, but he never advocated that western economies such as the UK, Australia, New Zealand, Canada and the United States should in fact become Communist or Marxist. Keynes was in reality a capitalist. His proposals for unemployment via government assistance were only meant to be implemented in the short term, not the long term. Keynes was not responsible for the measures undertaken by Roosevelt, neither is he responsible for the twit ideas of Krugman and co who have been advising the worst President ever in the United States. 

The world has been watching the kabuki theatre that took place in Washington D.C. To be honest, from an outsider point of view, this debt ceiling and the way in which a “budget” is determined is very foreign. Here in Australia, because our Parliamentary system is based upon the Westminster system, it is the Government, that is the party with the majority that must produce a budget. This happens once a year. For a very long time the budget was announced in August, but this was changed to about May each year. The budget is actually prepared by the Public Servants who run Treasury, with some input from the governing politicians.

For the most part the budget gets passed by both houses of the Parliament. The one time in my memory where there was a refusal by the Senate to pass the budget was in 1975 and the drama was all a part of the dismissal of the Whitlam Government – the majority of Australians gave their verdict on December 2 1975 when Malcolm Fraser was returned with a landslide victory.  The reason that this happened was to do with the various scandals that had erupted at the time, and in particular the Khemlani affair.

The whole process in D.C. seemed to not make a lot of sense and for a variety of reasons.  Østupid has been pushing for tax increases, but my question here is: what would J.M. Keynes recommend? Keynes had advocated that in a time of war taxes needed to be increased to pay for wartime equipment and the increase in defence personnel, and at other times taxes should be lowered. What Keynes had not factored into his economic theory was the Welfare State. There was no real welfare state when Keynes was alive. He did recommend that the government needed to provide short term assistance for the unemployed, but he did not factor in for long term unemployment.  The truth is: a country cannot support or sustain the welfare state unless there is full employment. I think that this is something that has been neglected by the Socialist governments everywhere. They see workers, especially the middle class as some kind of cash cow to be squeezed, but they never seem to see the full picture.

The absurdity of the kabuki theatre in D.C. would have to be Østupid lecturing Americans about “living beyond their means”, when in fact the national debt is not about what the general public borrows and spends, but is about what government is spending which is well beyond the level of the taxes that are being collected. There are many issues involved. Probably the most important that arose in 2009 was the ramming through of the health insurance Abominablecare bill. Health insurance should be a matter for the individual, not government. If government wants to provide assistance for the less well off, then that should be done through the programs already in existence – Medicare and Medicaid. Here in Australia we have had the same kind of thing, and quite frankly the government interference has led to a product that is not affordable for many people. On top of that the quality of the service provided has deteriorated whilst there are people who think that they should get assistance for things like IVF. Paying out for these expensive IVF treatments, and at the same time paying for abortions (in my view this seems to be hypocrisy) ultimately means that fewer dollars are available to treat cancer patients or patients with other diseases. It is a vicious cycle.

Australia is facing yet another form of kabuki theatre – the proposed tax on the air that we breathe in the belief that this will somehow change the climate – which has had the ultimate effect of reducing consumer confidence. The reduced consumer confidence has led to a decrease in sales, which in turn has led to job losses, which has led to a decrease in tax revenue collected. Ultimately if the tax is implemented, the effect will be prices going through the roof. I have no doubt that this will lead to the double digit inflation that we have not seen since the 1970s.

The conditions for stagflation are: high interest rates, high unemployment and high inflation. The governors of the Reserve Bank are keeping a lid on the high interest rates by their decision to not increase those interest rates in response to the changes in the consumer price index. However, what will they decide once this tax is implemented? If they decide to try and stop the inflation by raising interest rates then we will have a return to the 1970s which we have been avoiding.  Any rise in interest rates will in turn hurt small business owners in Australia with many making the decision to leave the market place due to the rising costs caused by price increases in utilities such as electricity.

So again, in these circumstances, what would Keynes recommend? Would Keynes agree with the appalling government decisions that have allowed government debt as a percentage of GDP to get out of hand? Would Keynes recommend a tax on the very air that we breathe? Would Keynes go along with the “green economists” who advocate for such a tax? Would Keynes advocate something like the ETS scheme? Or would Keynes have seen through this kind of scam, and have been one of the economists who speaks up against it? Would Keynes have recommended going off the gold standard?



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  1. Sugel said, on August 17, 2011 at 5:12 pm

    …Date.Event…1927..Keynes continues working in his academic and bursarial duties at Kings College a variety of business roles and his editorial and journalistic activities. ….Summer 1929..Keynes is made Fellow of the British Academy….October 1929..Led by Wall Street the worlds stock markets crash heralding an economic depression….4 November 1929.Keynes joins the governments Macmillan Committee of Enquiry into Finance and Industry….30 January 1930 .Keynes joins the Economic Advisory Council set up to report to the government on economic policy….10 May 1930.Keynes writes in the Nation .. The fact is – a fact not yet recognized by the great public – that we are now in the depths of a very severe international slump a slump which will take its place in history amongst the most acute ever experienced. .It will require not merely passive movements of bank rates to lift us out of a depression of this order but a very active and determined policy. …September 1930 .A large long-lasting world-wide cut in interest-rates is required Keynes writes in Svenska Handelsbanken Index….December 1930..A Treatise on Money is published in two volumes.

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