The answer to Covid economic crisis

One of the most peculiar aspects of the current debate in the US Congress on the big expenditure bills, and last week’s budget presentation before the British parliament, as the country struggles from the economic fallout from Brexit and the Pandemic, is that rarely has there been mention of the name John Maynard Keynes.

Keynes, without doubt, was the greatest economist of the last century. What Keynes taught was counterintuitive- that in a time of an economic downturn the answer was to prime the pump. Spend more. (The opposite of what a family should do when in debt.) That would revive an economy and increase the growth rate. The increased growth would provide more tax revenue which could be spent on aid for the poor, new infrastructure and the health services etc. As an economy grows the deficits many politicians say they worry about (although the Republicans only do when they are out of power) would become relatively smaller. In short, the debt would remain a constant figure while the size of the economy as a whole would increase. In other words, the total debt possessed by a country, relative to a country’s growing total income, would lessen. The percentage of debt would go down. Indeed, with interest rates as low as they are, these days it costs a government very little to borrow. As some economists have said it’s almost “free money”. Keynesian economics, intellectually derided by the Chicago school, in particular by the Nobel prize winning economist, Milton Friedman, and politically rubbished by Margaret Thatcher and Ronald Reagan, needs a comeback.

President Joseph Biden obviously believes in it, judging by his actions, but he needs to publicly credit and explain Keynes. Keynes’s principles of finance and economics are not hard to understand. Then it will be easier to carry doubters along. Even more so with Prime Minister Boris Johnson. The new UK budget seems orientated the Keynesian way, but he could go much further, not least in lowering taxes. In Germany, Keynes has long been relegated to a footnote in the economic debate. Until very recently, Chancellor Angela Merkel has believed in balancing the books. The result has been a brake on both German and European growth and, in the case of Greece, an imposed contraction that ruined the lives of millions of Greeks.

Just before the end of the Second World War the Western powers decided to rethink the international financial system. Meeting in July 1944 at Bretton Woods their top experts, including Keynes, representing the British government, discussed a new world order, convinced that the global system could not be left to the mercy of unilateral action by governments or to the unregulated workings of the international markets. Thus emerged the IMF and the World Bank. It was at the one and the same time a great achievement and a great disappointment. Over the last eight decades both institutions have been invaluable, but this success only begs the question what they might have done if Keynes’ original vision had not been cut down to size.

Keynes proposed an IMF whose resources would be equal to one half of world imports. In practice the IMF today controls liquidity equal to only a very small proportion of world imports. It can impose only a modicum of the financial discipline necessary in an age when speculative private capital movements crossing international borders are mind-blowing.

Keynes saw the IMF evolving into a world central bank, able to issue its own reserve currency, sufficient to meet the needs for expansion whenever and wherever needed. The IMF can issue so-called Special Drawing Rights, a minor but important step towards achieving this- they amount to a very small percentage of world liquidity. These SDRs can be exchanged for other currencies that in turn can be used to buy goods and services such as vaccines, medical equipment and food.

Besides more available public liquidity we are in urgent need of some sort of braking system when the private liquidity system spins too fast. Hence the renewed interest in academic circles of the proposal of the economics Nobel prize winner- and fan of Keynes- James Tobin of Yale University, for a tax of 0.5 percent on international currency transactions. This would curb excessive speculation, while yielding around $1.5 trillion a year for health and educational development.

So, who among the current policymakers will dare resurrect the name of John Maynard Keynes and preach his word? “Ring out the false, ring in the true”!