November 23, 2010
Cargo-Cult KeynesiansBy J.R. Dunn
For the second time in my life, the U.S. has descended into cargo-cult Keynesianism
Cargo cults were a product of WWII. The centuries-long isolation of the South Pacific's native Melanesian peoples ended with the coming of war. The islanders got along well with American GIs (far better than with the imperious and arrogant Japanese troops), who willingly shared their rations and other items. The Melanesians became used to the good life in the form of Spam, Lucky Strike cigarettes, and beer in the can -- the basic elements of true civilization.
When the war ended, so did the stream of American goods. But the islanders had a plan. Constructing fake airplanes on the abandoned landing strips, they entered the rickety control towers and spoke into objects similar in form to microphones in order to persuade the Gooney Birds to return with their largesse. It was a concrete example of the ancient magical formula that like begets like, and it worked the same as it ever does. For all I know, they're still waiting.
Fast-forward several steps in civilization to John Maynard Keynes. There exists a misunderstanding about Keynes and his economic theories. These comprise no formula for gross evil or the undermining of democracy. In fact, they are serious attempts to create something on the order of a unified field theory for the economic universe. As such, they are marked by serious flaws, the most critical originating in a profound misunderstanding of human nature. As an upper-class Englishman, Keynes had little grasp of the concept that human beings will use any excuse to act badly, even if it's an abstruse economic theory. (The Keynes dictum that our current predicament is derived from, by the way, goes like this: "run surpluses in good times so that you can run deficits in bad times." Nobody but nobody ever pays attention to the first phrase. With modern "Keynesians," it's all deficits, all the time.)
So take these two concepts -- run surpluses and like begets like -- and mingle them. The product is cargo-cult Keynesianism -- the notion, promoted by such witch doctors as Benjamin Bernanke and Paul Krugman, that if you print or otherwise create vast amounts of false money, then the real money (like attracted to like!) will return to the economy, like cans of Spam magically winging their way toward remote Pacific islands.
This is the precise monetary policy now being followed by the Obama administration. At the beginning of the third millennium, with every planet in this solar system reconnoitered and our probes slowly gliding into the galaxy beyond, with a worldwide communications and information network shrinking the globe until it fits into the palm of your hand, with gentech and nanotech promising wonders and horrors beyond the ready imagination, contemporary financial policy is being derived from a desiccated Edwardian economic theory on the one hand and prehistoric sorcery on the other. So don't smirk too widely about our friends in the feather headdresses impatiently tapping their feet down by the old airfield. They're a lot closer to us than you might care to think.
At least the good shamans of the Pacific probably gave up after it failed to work. Not so late-modern America. This particular perversion of liberal economic theory was first inflicted on the country during the presidency of Lyndon B. Johnson, a man who never met a spending bill he didn't like. In 1965, Johnson was faced with a conundrum: he needed to finance both a medium-sized war in Vietnam and a plan for a national welfare state he called the "Great Society." Though often characterized as an attempt to fulfill certain goals first set during the New Deal, the Great Society was in fact an effort to establish a universal nanny state on the European social-democratic model. As such, it required what we would today call an obamiad of ready cash. Johnson was stymied. He had no interest in raising taxes -- for one thing, his immediate predecessor, John F. Kennedy, had triggered a potent boom by doing the exact opposite.
It was here that his economic advisors (among them John Kenneth Galbraith), backed by the contemporary conventional knowledge, stepped in to assure Johnson that deficits were no problem under Keynesian theory. This was all Johnson had to hear. Beginning in the summer of 1965, the Treasury presses began roaring like never before, creating the dollars that would carry us to victory in Vietnam and a social paradise at home.
For a short time, the Johnson deficits heightened the '60s boom. The money was at first taken at face value. For a year or two, everybody felt rich. Then inflation inevitably kicked in, and monetary value started to evaporate. From the public's point of view, "prices began to rise." (It's actually the exact opposite -- monetary value falls, and prices kick up to match it.) The '60s boom faltered and then faded into nostalgia.
Johnson's successor, Richard M. Nixon, complicated things by dumping another batch of cargo-cult money into the economy in 1971 for the express purpose of jolting the economy during the run-up to the 1972 elections. It worked just fine until a mild recession caused by tightening the money supply afterward frightened everyone into opening the spigots once again. That established the status quo for the rest of the decade, resulting in a slumbering economy alongside double-digit inflation -- that two-headed monster, "stagflation," a kind of dynamic stasis in which each distinct economic malady served to reinforce the other. Any attempt to improve matters threatened to unleash economic chaos. Economists were stymied -- most considered such a state an impossibility. And in the natural run of things, they were quite correct. It was continual governmental interference that created the '70s slump.
Ronald Reagan at last bit the bullet, cut off the money flow, and purged the economy by means of the 1982 recession. That brief slump was followed by an unprecedented twenty years of prosperity.
Fast-forward to 2010. We will no more than mention the original "Stimulus," which can be characterized as conventional Keynesianism mismanaged to the point of comedy. The vast bulk of that three-quarters of a trillion (at least, the part that we know about) was handed to the unions and the financial industry, both legendary for their efficiency, economic effectiveness, and public-spiritedness. This money had no measurable effect on the economy. (Obama claims that the slump would have been deeper and unemployment far higher without it. You'll find the salt shaker in the kitchen.) Its failure brings us to QE2, or Stimulus, the Sequel.
QE2, which means Quantitative Easing, is evidently Bernanke-speak for "running a deficit." The current run of liberal economists is more sophisticated than that surrounding poor LBJ (Johnson, depressed and with no idea of what had hit him, essentially drank himself to death by 1973) in the sense that Keynes, with his walking stick and his gentleman's tweeds, was more sophisticated than the Melanesian chief with his grass skirt. Rather than pump up the money supply directly, the government is going through a complex charade of selling Treasury bonds, evidently in the hopes that this will fool the economy into accepting the new money as the real thing. It will, of course, do nothing of the sort. Bernanke and Geithner and company -- with the avid support of Krugman, most of the media, and the financial industry, who will all make out no matter what happens -- are repeating the Johnson administration's mistake. What matters is the infusion of virtual cash flooding the economy, not the means by which it was introduced. It will serve the same role and lead to the same results. (Bernanke claims that there will be no inflationary effect, which is nonsense.)
What will the consequences be? Bernanke has stated that "[w]e have no idea what the hell is going to happen." The hell we don't. The first result will be economic stagnation and serious inflation, and possibly the return of that fearsome, unlikely beast, stagflation, and for the same reasons. I will leave further economic questions to the professionals. (Recent claims that inflation is at "the lowest level since 1957" are simply bizarre. Walmart is only one major company that has already noted inflation in its supplier costs, which means that price jumps are right around the corner for the rest of us.)
For the country as a whole, it means truncated influence and presence on the world stage in both the diplomatic and economic spheres. Numerous problems and difficulties will arise that would not otherwise have arisen, and the American ability to confront and solve them will be unquestionably limited. Consider the rise of fascism in the 1930s. It is easily possible that we will see the millennial equivalent over the next twenty years.
For business, many opportunities will be forgone, much research will not occur, many breakthroughs and new products and services will not reach the market -- at least from the United States.
But the impact on individuals is what matters most. A nation comprises individuals and nothing else. Economists and financial types tend to view the world only through figures -- so we're told that the current recession ended over a year ago, although we can clearly see misery and distress deepening all around us. I was an eyewitness to the years of the Johnson Depression (as it should be called but for some reason is not). What individuals are facing, as we faced and endured in the 1970s, is a lost decade.
Advanced education will become something of a luxury, certainly for those who are financing their own way, and even for those in more privileged groups. (I can testify to this personally -- I was awarded a scholarship for outstanding marks in the state college entry examination, only to be told on registration that the New York State Regents had gone bankrupt.) Fewer educational qualifications means less in the way of opportunity, not to mention a shrinkage of skilled workers in the labor force.
Wages and salaries will stagnate further. Squalid, low-level jobs will be the rule, and people will be happy to get them. It will be an era of small hopes and minor achievements. Possibilities will close; people will give up on dreams and goals, settling for less than they deserve. It will break many people. We will see an inevitable rise in mental illness and suicides. In Japan, the Aokigahara Forest at the foot of Mt. Fuji has long been known as the "Suicide Forest." The number of bodies discovered there nearly tripled after the country's economic slump in the 1990s.
Life will become a little more ragged and less attractive than it has been. People today have no idea how clean and pleasant most American cities were up until the 1970s. Then it got worse, and we never quite recovered. It will get worse again. Less money will be spent on keeping up on all levels, from government through business down to individual homeowners. For some it will be even more desperate -- homelessness first arose as a serious problem in the 1970s.
Crazy fads will appear (both disco and punk arose during the 1970s), along with a rise in strange cults and movements (the 1970s effectively began with the Manson murders and climaxed with the Jonestown massacre). The frenetic and self-destructive will move to the fore, as always occurs when the worthwhile is put out of reach. Think of life in Weimar Germany during the 1920s.
All this and worse occurred during the 1970s. Much of it will be news to younger readers. Those years aren't discussed much, sandwiched as they were between the boom years of the '60s and the '80s. To those of us, the late boomers, who reached our majorities during this period, the claim that this latest slump is the "worst since the Depression" is more than a bit of a joke. There's a reason that the late cohort didn't have the same impact as those who came up during the '60s. We had a decade cut out of our lives, in a society becalmed and adrift.
We can't avoid all of it. We are locked in for the next few years. It's too late to turn back. But we can avoid a full decade of this level of grief if we make the right moves. Because the sad thing is that all this is unnecessary. The formula for ending a slump is well-understood. No massive "stimuli," no QE ad infinitum, no megalomaniacal efforts of any kind. There's nothing magical about it. Merely lower taxes, loosen credit, and above all, provide a secure business environment. Time will do the rest. This is how both Reagan and W accomplished it. The fact that this solution is being ignored for purely ideological reasons is nothing less than shameful. It's the exact equivalent of those odd religious sects that would rather see a child die than be subject to an operation -- with the single difference that the cult preachers can't quit and take up a professorship in one of the Ivies.
This past midterm election is a good sign in more ways than one. It will help assure business leaders that a more stable, less intrusive governmental order has returned. We will witness no more arbitrary takeovers of private companies at the whim of the Oval Office. Now we need to see that the Bush tax cuts -- yet another of his accomplishments that has outlasted him -- is not phased out early in the new year, and scuttle any further Obamite schemes for raising taxes. A less stringent credit regime may well follow (and perhaps already has, if recent signs are any indication). Carried out over the next year to eighteen months, such actions will stabilize the economy and allow it to begin crawling back over a two- to three-year period. This is probably the best we can hope for, and compared to the '70s (which for our purposes lasted from 1969 to 1982), it is not bad at all.
Having lived through it once, I wouldn't wish the Great Inflation on anybody, not even with the knowledge that most of the people in this country have it coming. There's a Spanish proverb that covers this: "Take what you want -- but pay for it." Most of the voters, using the same level of thinking as the poor postwar Melanesians, decided that they wanted an incompetent adolescent narcissist for president. Now that the bill has come due, they've concluded that they don't want to pay for it. They're lucky the rest of us don't, either.
J.R. Dunn is consulting editor of American Thinker and will edit the forthcoming Military Thinker.