Thomas Geoghegan has an excellent essay in the latest issue of the Nation that aims to move beyond caricatures of Keynesian thought and explain what the man actually believed about getting economies out of depressions. As it turns out, Keynes was very concerned about countries running trade deficits and, related to that, the crowding out of investment in real goods and services by the financial sector:
For Keynes the key to getting the rich to invest in labor on the construction of durable assets was to hold down the windfall returns from loans, buyouts and financial speculation — the income he would call “interest.” That’s the nub of our country’s trade deficit problem. In Book VI [of the General Theory], Keynes adumbrates the one big thing he learned from the Bourbons, the Habsburgs, John Locke and even Adam Smith about the importance of holding down the rate of interest to stimulate trade, to make it less attractive to “invest” in short-term derivatives and relatively more attractive to invest for the long term in widgets. Keynes put it this way: “It is impossible to study the notions to which the mercantilists were led by their actual experiences, without perceiving that there has been a chronic tendency throughout human history for the propensity to save to be stronger than the inducement to invest.”
This argument jibes with, among others, Simon Johnson’s warning of the banking industry’s takeover of American politics, as well as long-running labor-liberal critiques of the recent Anglo-American model of outsourcing manufacturing and replacing it with financial services.
It’s important, however, to draw this out in more detail. To begin with, looking to Germany, as Geoghegan does, as a model of a more export-oriented economy is probably not a such a good idea right now, for obvious reasons. Admittedly, that has less to do with Germany’s actual economy than its hand in creating the eurozone and the insular, unaccountable European Central Bank.
More significant is the fact that closing the trade deficit isn’t something that can be achieved by reverting to the status quo with respect to manufacturing, which is what usually comes to mind when talking of boosting exports. Despite frequent lamentations that we no longer “make things”, the US actually remains the top manufacturing country in the world; it’s only the number of people employed in manufacturing that has fallen off a cliff. Some of that is due to outsourcing, but it also reflects rising productivity and automation. As it happens, Keynes addressed this question of technology displacing labor directly in “Economic Possibilities for Our Grandchildren” (PDF); in it he predicted that the vastly richer world of 2030, a century after the essay’s publication, would allow people to work as little as 15 hours per week, while enjoying the same levels of prosperity. Obviously, that isn’t likely to come to pass for a variety of reasons — see this discussion in Dissent from a few years back — but the point is that the question of full employment needs to be disaggregated from the question of innovation and productivity improvements. American manufacturing today is much more efficient than it’s ever been, as Matt Yglesias has pointed out; it doesn’t strike me as advisable to give up that advantage for the sake of jobs, any more than it would be to give up modern farming equipment for the same purpose.
Indeed, if we want to discuss reducing the trade deficit and increasing employment, why don’t we start by observing that a great deal of the US trade deficit is oil? If it’s true that trade deficits impede long-term growth, then probably the most pro-growth measure the US could undertake is to vastly reduce oil consumption, which would have the nice side effect of insulating the economy against future price shocks. Alternatively, the US could more aggressively increase domestic oil production, but given the relatively trivial amount of untapped reserves, that doesn’t seem like a viable strategy.
