An abiding fiscal presence

Keynes: The English economist preached short-term stimulus for sluggish economies - the type just proposed by the president.

January 12, 2003|By Michael Hill | Michael Hill,SUN STAFF

WHEN PRESIDENT George W. Bush announced his economic package last week, towering in the background was the ghost of John Maynard Keynes.

The views of this British economist - once so reviled by conservative Republicans that "Keynesian" was a pejorative term - are now so entrenched that any president who does not at least appear to follow them risks severe political damage.

Before Keynes, business cycles were seen as something like the weather - there was not much you could do about them, other than complain.

But in 1936, in the midst of the Great Depression, Keynes published his most famous work, The General Theory of Employment, Interest and Money. It argued that governments should not just sit back, keep their fiscal houses in order and wait for the cycle to find its upside; instead, government had the power and the obligation to intervene, to prime the pump and get the country working again.

The world of economics - and of politics - would never be the same.

"He was immensely important," says E. Roy Weintraub, an economist at Duke University. "He transformed the way we talk about the economy and the way we think about the role of the state in economic life."

Since the acceptance of Keynes' ideas, presidents are virtually required to do exactly what Bush did last week - to use the financial power of the government to respond to an economic downturn.

"It is probably hard for a lot of people today to understand the fact that before World War II, Americans did not hold the president of the United States responsible for the economic health of the nation," says David B. Sicilia, a historian of economics at the University of Maryland, College Park. "Now we do, and Congress as well. That is really a pretty recent phenomenon."

Keynes was born in 1883 in Cambridge, England, son of renowned economist John Neville Keynes. With a degree in mathematics from Cambridge, Keynes first came to prominence while working for the British Treasury on economic issues during the negotiations of the Treaty of Versailles that ended World War I.

He resigned in protest, presciently saying that the reparations imposed on the Germans were so harsh they would keep that country poor and lead to its political instability. Keynes returned to Cambridge, his scathingly critical writings on the Versailles negotiations making him something of a celebrity.

Using interest rates

Keynes' writings in the 1920s concentrated on monetary policy, the way in which governments can affect the supply of money - and thus prices - with interest rates. The Great Depression caused Keynes to look for a new model.

Business cycles had been seen as self-correcting - wages would fall in downturns until full employment was restored, then demand would rise and the economy would head up again. Such cycles were seen as healthy, cleaning out the economic deadwood.

But in the Depression - for reasons both fiscal and psychological - the cycle was stuck on the downside. Keynes called on governments to intervene, running up large deficits if necessary to put money in people's pockets with public works programs and tax relief. The idea was that this would increase demand and get the cycle moving up again.

Even in the Depression, such ideas were a hard sell. The classic economics model called for a government to balance its budget.

"The pre-Keynesian view was reflected in the writings of Adam Smith that were really embraced by the founders of the United States," says Steve H. Hanke, a professor of applied economics at the Johns Hopkins University. "Smith wrote in The Wealth of Nations in 1776, `What is prudent in the conduct of every private family can scarcely be folly in that of a great kingdom.'"

Kevin D. Hoover, chairman of the economics department at the University of California, Davis, says that balanced budgets still carry a political punch. "It's a very deeply held view of personal virtue and probity - `Never a borrower or a lender be,'" Hoover says. "It's a false analogy because the situations of an individual family and of a sovereign government are so different. But it's always a good sell to people who don't have a good understanding of economics, and whichever political group can use it for an advantage will always do so."

In 1932, Franklin D. Roosevelt used it in his first campaign for president, denouncing Herbert C. Hoover for running a deficit during the first years of the Depression. Roosevelt promised to balance the budget.

Even before he published his General Theory, Keynes visited Roosevelt and encouraged more government spending. He made little headway. Michael Bradley, an economist at the University of Maryland, Baltimore County, says that Roosevelt was trying to deal with the Depression with monetary policy, by adjusting interest rates, instead of fiscal policy, by spending money. Keynes, Bradley says, compared that with "trying to get fat by buying a big belt."

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