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And what the @#$% do they mean by Keynesianism?!

There are few words so simultaneously fraught with but utterly devoid of meaning as “name-nouns.” You know what I mean — words like “Marxism,” “Hobbesianism,” or, everyone’s favorite in the last few months, “Keynesianism.” Well, the word-du-jour on the economic crisis buffet line is “Keynesianism” (and its conservative-speak substitute, “socialism”). In its totally-drained-of-meaning state, Keynesianism is simply fancy-speak for using government spending to stimulate the economy to full employment. But did you know that Republicans in Congress who are clamoring for tax cuts (the House Republican version of the stimulus bill was 100% tax cuts) are just as much Keynesians as the so-called fiscal Keynesians? Since everyone who plays a pundit on TV and in the press is throwing this word around like it actually has some meaning, what in the name of sanity does it mean? And what does it mean to you, the small business owner, the enterpreneur, the solopreneur, or just the normal Joe or Jane working out of your house to supplement your income?

These folks are making or obstructing plans that may mean the difference between your business succeeding and your business — and your job, and your house, and your car — being swept into the dustbin of history. So, what, exactly is this old-fangled economic policy theory and should you be worried?

There are few people on the planet who have read all of Keynes and I can bet you a $150,000 shopping spree at Neiman Marcus that most every pundit or columnist who mentions Keynes hasn’t read much if any of his work. The folks who do read Keynes either fall in the “scholar” camp or the “get-a-life-looney” camp. When I read all of Keynes (all, I say, all — and in the original English, no less), I was studying for a doctorate in English. I’d like to think I was in the “scholar” camp, but mature reflection on my grad student and university facult days leads me to believe I was more in the “get-a-life-looney’ camp.

When I first studied macroeconomics oh-so-many years ago, I had two professors. One, Walter Heller, was a dedicated Keynesian and the second, I-forget-his-name, constantly declared that Keynesianism was dead. One week the Keynesian would lecture, the next week the monetarist, sort of the academic version of table tennis.

Since the wage-inflation spiral of the late 60’s and 70’s was largely tamed and contained by the monetarist policies of Paul Volcker at the Fed in the 1980’s, economists have declare Keynesianism dead and monetarism the new, indisputable paradigm.

In the simplest possible terms, monetarists believe, like classical economists, that a free-market economy will naturally find its equilibrium in full employment. So the job of policy-makers is not to chase unemployment, but to prevent inflation, which is largely controlled by the amount of money in the economy.

Okay, yes, this is a bastardization, but I only had one paragraph. Give me a break.

Keynes, in the 1920’s and the 1930’s, came to repudiate classical economics by asserting that not only could a free market economy find equilibrium at something less than full employment, it could find equilibrium at pretty astonishingly high unemployment.

In Keynes view, the demand side of the supply-demand equation could sometimes be deficient and the market would clear at lower production rates and higher unemployment rates. If a market equilibrium was reached at less than full employment or at high unemployment, then the demand side of the equation needed to lifted for the economy to grow and people to get back to work.

Policy makers have several tools at their disposal. For one, they can borrow money and spend it. Since demand is deficient, that means more people are saving rather than spending. Well, if they’re going to save, the government should simply borrow this money and then spend it, thus increasing the demand side of the equation. For another, government could lower taxes. People would have more money and, the lower they are on the income scale, the more of their returned taxes they’ll save.

In contrast, supply-siders, such as all the Republicans in our legislature as well as luminaries such as Greg Mankiw and Eugene Fama, believe that the economic downturn is largely due to insufficient supply rather than demand. They believe that the money government would spend to stimulate the economy is best spent by producers, i.e., Ford Motor Company, IBM, Intel, Amazon, and the like, as investment in new technologies, factories, and products. Most Republicans in Congress believe that the best way to do this is to put more money in investors’ pockets through targeted tax cuts. Economists far more brilliant than I’ll ever be, such as Eugene Fama, believe that these investments are far more economically productive — and far more stimulative — than government spending.

There are, however, economists such as Brad DeLong and others — including most Democrats in the federal legislature — who have come to a more or less middle ground. Liberals by nature, they accept the general outlines of monetarism, but they also accept that, in this current crisis, monetary policy has shot its wad. The primary tool in the monetarist’s money-bag — lowering interest rates indirectly by lowering the federal funds rate — is now near useless since the federal funds rate is as low as it can go. The primary tool in the supply-siders money-bag — tax cuts for the investing classes, i.e., corporations and the wealthiest Americans — has been more or less debunked in studies of previous tax cuts. Ronald Reagan nearly halved the top tax rate and it had little stimulus on the economy. What, in the view of the more pragmatic economists, will dropping the top tax rates a few percentage rates do? And how will dropping the corporate tax rate help corporations who are losing money (and so paying no corporate income taxes)? Monetary tools, primarily interest rates which determine the cost of money, have no value when businesses and banks look into the future and see nothing but losses and defaults coming their way.

The Fed has lowered interest rates as far as they can go, interest rates across the board (except credit cards) have fallen to record levels, and the federal government has actually pumped money into the banking system. And the banks still aren’t lending. And why should they? All they see is a steadily increasing risk of massive defaults.

Furthermore, businesses are cutting back on production and staff because of excess inventory, i.e., people aren’t buying what they have already made or already stocked their store shelves with. When people stop buying, inventory piles up, prices go down, production is slowed, people get laid off, and people stop buying even more. Ford’s problem isn’t its taxes, it’s that people aren’t buying cars. Intel’s problem isn’t that it is losing too much money to taxes, it’s that people aren’t buying computers, which means they aren’t buying Intel processors.

If people started buying cars and computers again, the argument goes, then and only then will companies like Ford and Intel actually start investing rather than laying off people and closing production facilities. So the government borrows the money that people are saving rather than spending and it gives tax cuts to people most likely to spend rather than save those tax cuts in order to stimulate demand.

All this is and is not Keynesianism and is and is not socialism.

In an excellent article in this week’s New Republic, John Judis summarizes the political/economic thought of Keynes. He is one of the first commentators to take Keynes’ politics seriously and not try to divorce it from the economics (Keynes called himself a “liberal socialist.”) But this is the takeaway quote (it’s long, but worth a read):

The most important tool that Keynes recommended for overcoming unemployment was public investment. It enjoyed what Keynes’s associate Richard Kahn called a “multiplier.” Public investment in a new hospital, say, creates jobs and income not only for construction workers, but for the people and businesses that service the workers. Conservatives and big business, however, have objected to public investment–for instance, in high-speed rail or solar paneling–that would strengthen government’s hand in dealing with an industry or compete with private industry. It’s socialism, they say–and, in Keynes’s terms, it is.

Next on the list of Keynesian tools are government programs that redistribute income from the well-to-do (who have the least propensity to consume) to the poor (who have the most). As John McCain demonstrated during the presidential campaign, such redistributionist programs can also easily be denounced as socialism.

A less controversial, though still effective, tool for combating chronic unemployment is low interest rates. But it can be rendered useless during the kind of downturn Japan suffered in the 1990s and the United States is suffering today, when businesses can see only losses and banks only defaults on the economic horizon.

That leaves, finally, tax cuts. These arouse the most enthusiasm among Republicans and business, but are the least effective means of combating unemployment. The bulk of income tax cuts usually doesn’t accrue to the people with the highest propensity to consume. Moreover, in the post-1971 era of yawning trade deficits, what is consumed is often imported. That may help employment in Japan or China, but not in the United States.

If you look at America’s periodic experimentation with Keynesian policy, it has been guided from the beginning by a determination to avoid any measures that might be described as socialist. It began with what was later called “military Keynesianism”–defense spending being one kind of public investment that was politically safe. But it has increasingly centered on tax cuts. Kennedy’s vaunted experiment with Keynesianism consisted of tax cuts. So did Ronald Reagan’s and George W. Bush’s. Whatever benefits these stimuli provided in the short term, over the long run, they have exacerbated the potential for chronic unemployment by widening income disparities and reducing the overall propensity to consume [note: Keynes believed that the wealthier a group became, the less of each dollar they would actually spend on consumption — this is what is meant by the overall propensity to consume]. A complete reading of Keynes would have counseled a very different approach. But that has never been the way Americans treated Keynes. Until, perhaps, now.

And, if you’re an entrepreneur, you need to memorize the following passage, which seems to be as true a prognostication as I’ve seen anywhere during this crisis:

Moreover, Obama will need to venture into areas that Keynes did not anticipate. Keynes did not foresee government deciding which industries to subsidize. Government, he wrote in The General Theory, should be concerned with “determining the volume, not the direction, of actual employment.” But facing the threat of global warming, finite oil supplies, and a large trade deficit, Obama will have to make decisions about the direction, as well as the volume, of domestic investment. He is going to have to pick winners and losers. Which industries will aid in reducing greenhouse emissions? Which will reduce the country’s dependence on oil? And which will help reduce America’s trade deficit? Obama won’t be able to avoid these kinds of choices. Wittingly or not, he will be putting government in a position to shape private capitalism according to “general social advantage.”

So is this all simply dry, academic discussion? No more important than the real meaning of Virgina Woolf’s metaphors in The Waves?

For our audience, no.

There is no business segment more dependent on demand than small business owners, start-up entrepreneurs, and solopreneurs. The decline in demand is certainly sending the income statements of multinational behemoth corporations into the toilet, but it’s putting home-based businesses and small businesses out of business.

Tax cuts for corporations will have little or no benefit for start-ups or small businesses. Interest rate reductions mean nothing if your bank won’t lend you money. Sure, they’re handing out business loans at 6% interest. Just not to you.

If you’re running a small or micro-business, or you’re contemplating a start-up, your interest lies in ramping up overall consumer demand. Which means that you’re on the side of the Keynesians in this debate since you will see the most benefit from tax cuts to low income people and government spending.

In addition, if government is going to start “picking the winners” by investing in certain industries, then your start-up or business stands to gain by positioning itself into one of the winning columns. Government is simply a large consumer group — when it starts spending money in an industry, that attracts investment and entrepreneurship to that industry. In an economy of declining demand, entrepreneurs small and large should welcome government “picking the winners” since that makes opportunity that much easier to catch.

Many moons ago, one of the owners of the business I worked for went full-out for George W. Bush and his tax cuts. I said to him at the time, “What good is a tax cut if you go out of business? Don’t you want policy that creates business rather than reduces business taxes?”

He shut his business in 2006 after thirty years in business and five consecutive years of losses.

Hope he enjoyed all those business tax cuts. Because he never got a single one (he lost money all those years).

Think about your business’s bottom line. I don’t care what your conclusion is (increase demand or cut business taxes), but you owe it to your business, start-up, or start-up idea to contact your congressperson and senator and tell them which course of action you want them to take.

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