Permanent deficits are not Keynesian

John Maynard Keynes, in addition to being the brother of the author of the first book on blood transfusion, was a famous economist whose policy recommendations have been widely abused by politicians for 50 years. His first widely known book was on “The Economic Consequences of the Peace.” It predicted that the harsh Versailles peace treaty would ruin Europe, a prediction that came true in 1929.

Reparations were set at a level that Keynes perceived would ruin Europe, Woodrow Wilson refused to countenance forgiveness of war debts and would not even let the US Treasury officials discuss the credit program. While Keynes’ proposals were far sighted, few others at the Versailles Conference understood their importance and Keynes’ proposals would have been controversial in nations such as France, Britain and the US.

Keynes’ book had a major effect on the US Congress’ refusal to ratify the League of Nations treaty.

Another critical insight was his prediction of the consequences of inflation.

Keynes outlined the causes of high inflation and economic stagnation in post-WWI Europe in The Economic Consequences of the Peace.
 
“Lenin is said to have declared that the best way to destroy the Capitalist System was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some… Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.”
 
Keynes explicitly pointed out the relationship between governments printing money and inflation.
 
“The inflationism of the currency systems of Europe has proceeded to extraordinary lengths. The various belligerent Governments, unable, or too timid or too short-sighted to secure from loans or taxes the resources they required, have printed notes for the balance.”

It is significant that the US has debased its currency the past 40 years far more than the average citizen realizes. The present dollar is worth about 40 cents in 1970 dollars. Using the methodology at this site, which uses US Department of Labor data, a $100. item in 1970 would cost $582.60 in 2011 dollars. That uses a cumulative inflation rate of 482.6%. Using that calculation, the present dollar is worth 20 cents in 1970 currency.

The most common attribution to Keynes is the “pump priming” role of running budget deficits. However, his theory was the “countercyclical” principle of government budgets. That supposes that the government runs surpluses in good economic times, then deficits in bad economic times. Keynes assumed that these two phases of government action would cancel each other out. His work was based on his theories of how the Great Depression occurred. His apologists have used the Second World War as an example of Keynesian economics. They do not mention that the high deficits that were run during WWII were funded by US citizens who bought war bonds. Inflation was limited by price controls and consumption was limited by rationing. The excess income that was generated in war industries was invested in the national debt. We were not borrowing from another country and, after the war, the budget rapidly paid off the war debt. The national debt was small before the war.

US National Debt

What we have today is very different. Here is a useful explanation of why Keynes is not the author of present national policy. There is more explanation here.

If Keynes were alive today, what would he think of President Obama’s fiscal policies?
 
He would roll over in his grave if he could see the things being done in his name. Keynes was opposed to large structural deficits. He thought that they chilled rather than stimulated the economy. It’s true that we’re stuck with large deficits now. The goal should be to reduce them, not to take on new spending that makes them worse.
 
Today, deficits are getting bigger and bigger with no plan to significantly lower them. Keynes understood what the current administration doesn’t understand that the proper policy in a democracy recognizes that today’s increase in debt must be paid in the future.

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Nevil Shute Norway

One of my favorite novelists is Nevil Shute. He was an engineer, as was I, plus he writes about people with an ability to show their humanity and their deeper motivations without a lot of explanation. He is the engineer’s novelist, the businessman’s novelist and should be on every list of conservative novelists. I have read all his post-war novels, most of his wartime novels and a selection of his pre-war novels. He died in 1960 and all his books are still in print.

I was a college student when “On the Beach,” possibly his most famous novel, came out. It scared me so badly that I have not been able to enjoy rereading it, as I have his other books. I was a college sophomore and familiar with his other work at the time. I had read his aviation novel, “No Highway,” and was aware that the plot device in that book, of metal fatigue causing a new airplane to crash without explanation, had been prophetic. Shortly after “No Highway” had come out, the British Comet jet airliners had begun to crash and, when finally identified, the cause was metal fatigue.

Shute had written another prophetic novel in the late 1930s, called “Ordeal,” which predicted the effects of the Blitz on London. Both of these books, with their predictions borne out by history, caused me to be very shaken by “On the Beach.” A rather successful movie was later made from this novel, which Shute hated because it had suggested that the two principle characters, played by Gregory Peck and Ava Gardner, had slept together while he believed it important to establish their morality, even when doomed.

I very nearly dropped out of school after that book and spent a year or two getting over the idea that I would soon be fried in a nuclear war. My reaction was based as much on my regard for his novels as for the topic, itself. A quite good movie was made from “No Highway” with James Stewart, Glynnis Johns, and Marlena Dietrich.

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Coolidge- Summing up

I promise this is the last post of this series.

Coolidge believed that the wedding of government and business would lead to socialism, communism or fascism. Hoover considered Henry Wallace a fascist for supporting the McNary-Haugen bill. Hoover, ironically, was to bring on the Depression by progressive measures that might have been called a form of fascism. The farm bill would be re-introduced under Hoover and die. Only during the New Deal would it find enough support to become law. The summer of 1927 was peaceful and prosperous. It was the summer of Babe Ruth’s 60 home runs. The Yankees would win the World Series and end up with a winning percentage of 0.714, still unsurpassed. In September, Gene Tunney defeated Jack Dempsey in the fight marked by the “long count.” The “Jazz Singer” came out that fall, the first talking feature picture. Charles Lindbergh flew the Atlantic in May of 1927. He and Coolidge were much alike yet different. Both were shy and diffident but Lindbergh was happy to cash in on his fame while Coolidge refused all offers after he left office.

Coolidge arranged for Lindbergh to return to the states aboard the US cruiser, Memphis, where he was met by a crowd and by cabinet members, then there was a huge parade through New York City. Lindbergh and his mother stayed with the Coolidges at the temporary White House where Dwight Morrow, close friend of Coolidge from Amherst, introduced the young aviator to his daughter Ann. Aviation stocks, along with many others, soared and the Dow Jones Average by year end was at 200, the record high.

In his December 6, 1927 State of the Union message, he mentioned an economic slowdown and asked for the same things he had been requesting; sell Muscle Shoals, help farm cooperatives and keep spending down. In May of 1928, he complained to reporters about Congressional spending. “I am a good deal disturbed at the number of proposals that are being made for the expenditure of money. The number and the amount is becoming appalling.” He managed to get another tax cut passed including a cut in the corporate tax rate. The surplus that year was $398 million.

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The Coolidge Presidency III

La Follette ran for president in 1924, as feared by the Republicans, but on the Socialist ticket and got little support from mainstream voters. His issue was “control of government and industry by private monopoly.” Coolidge ran a low key campaign and, as he had done in Massachusetts, did not name his opponents. His speeches were not in campaign style but on general subjects like “What it means to be a Boy Scout,” and “The duties of citizenship” including, of course, the obligation to vote. He used radio addresses very effectively long before Roosevelt adopted the medium. Coolidge’s voice, unlike most politicians of the era, was well suited to radio but could not reach the back of large crowds. In a 1927 poll on radio personalities, Coolidge came in fourth, after three musicians.

One of Coolidge’s radio talks had a profound impact on a nine-year-old boy who had put together the crystal set on which he heard the president. It was 1922 and Eugene Fluckey was nine years old. What he heard was “Press on. Nothing in the world can take the place of persistence. Talent will not; nothing is more common than unsuccessful men with talent. Genius will not; unrewarded genius is almost a proverb. Education alone will not; the world is full of educated derelicts. Persistence and determination alone are important.” The boy was so awestruck that he scribbled down the president’s words. He would later become the most decorated submarine captain of World War II and completed 12 war patrols without the loss of a single man in his crew. He was awarded the Medal of Honor and five Navy Crosses. He and his ship, the USS Barb, were known as “the galloping ghost.” Fluckey later told the story, “Silent Cal did not speak often but when he did people listened.”

Some of Coolidge’s refusal to campaign was certainly his depression after the death of his son. Some was a recognition of his own abilities, or lack of them. In his Autobiography, he says, “When he went, the power and glory of the presidency went with him. I don’t know why such a price was exacted for occupying the White House.” Dawes took up the slack and enjoyed campaigning. His delivery was electric. One said of him, ” It was said that he was the only man in the world who, when he spoke, could keep both feet and both arms in the air at once.” His principal themes were LaFollette and the Democrats. For LaFollette, it was “red radicalism.” He spoke out forcefully against the Klan in August but was warned that it could hurt the ticket and he left that topic alone thereafter. Davis, the Democrat, in spite of being warned, attacked the Klan forcefully but nobody was paying much attention. Oddly enough, he would be the opposing counsel in 1954 for Brown vs Board of Education opposing school integration.

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The presidency of Calvin Coolidge II

Coolidge was more concerned with domestic issues than foreign policy. This had been true of most US presidents since the Civil War until 1917 and it was part of Harding’s “Return to Normalcy” plan. Coolidge knew little about other countries although he was not an isolationist. The true isolationist policy of the US was in the 1930s under Roosevelt who canceled a Hoover sponsored economic summit in Britain as soon as he was inaugurated. Only in 1939 and 40 was Roosevelt converted to the internationalist that is remembered by his supporters and biographers, internationalists themselves. I will have more to say about the slanders of Harding and Coolidge by the political left and the historians later.

Coolidge’s domestic agenda was dominated by a few issues. The first was the emergence of the “Farm Bloc” in Congress. The McNary- Haugen bill was the first of the “farm relief” bills and would dog Coolidge through his presidency as he vetoed it but it kept coming back as the farm bloc grew stronger. The background of the bill is well stated in the Wikipedia article:

World War I had created an atmosphere of high prices for agricultural products as European nations demand for exports surged. Farmers had enjoyed a period of prosperity as U.S. farm production expanded rapidly to fill the gap left as European belligerents found themselves unable to produce enough food. When the war ended, supply increased rapidly as Europe’s agricultural market rebounded. Overproduction led to plummeting prices which led to stagnant market conditions and living standards for farmers in the 1920s. Worse, hundreds of thousands of farmers had taken out mortgages and loans to buy out their neighbors property, and were now unable to meet the financial burden. The cause was the collapse of land prices after the wartime bubble when farmers used high prices to buy up neighboring farms at high prices, saddling them with heavy debts. Farmers, however, blamed the decline of foreign markets, and the effects of the protective tariff. They demanded relief as the agricultural depression grew steadily worse in the middle 1920s, while the rest of the economy flourished.

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