Monday, September 27, 2010

Waste, Political Degradation, and Tubes of Money

-- Posted by Neil H. Buchanan (from London)

Professor Dorf apparently viewed my departure from the country as an opportunity to turn his attention to economics, posting some very useful thoughts last Thursday about the new national obsession with government spending. I have very mixed feelings about how knowledgeable Mike -- a con law scholar -- is about Keynesianism, given how little con law I know. (My reference to Griswold last week hardly counts.) Need I ever return to the U.S.? Maybe.

In the extremely good discussion of Mike's post on the comments board, a question arose about the value of wasteful (and even destructive) government spending. Even someone with a rather sophisticated understanding of Keynesian policy recommendations during a recession could understandably -- though incorrectly -- conclude that Keynes was indifferent to the content of the spending that a government might undertake to bring the economy back to full employment. Indeed, the scorn among some on the left for "military Keynesianism" is based precisely on this idea.

That is, it is a matter of some embarrassment that the first truly successful Keynesian stimulus program was enacted in Nazi Germany. The German economy finally arose from its prolonged economic disaster (which had been made much worse by the victorious allies' insistence on receiving compensation payments for WWI), quickly becoming a global economic powerhouse, by putting people to work building tanks, bombs, airplanes, guns, bullets, uniforms, and so on. The U.S. also never really emerged from the Great Depression until we went to war, which gave us the excuse to increase the debt ("Buy Bonds!") in order to win an existential conflict.

In fact, the quasi-Marxist left has taken the point further and claimed that a modern capitalist economy cannot maintain full employment without periodic bouts of outright destruction. Under certain (actually not outlandish) assumptions, one can show that a modern economy can only be kept at full employment by engaging in so much investment that the capacity of the economy will grow systematically faster than the labor market, preventing the labor market from catching up with the moving target of the economy's growing productive capacity. Hence, the need for a jolly good war every now and then, to allow the capital stock (and that pesky population of the unwashed) to be knocked back down to size.

One need not be nearly so pessimistic or cynical, however, to imagine that Keynesians are perfectly happy with wasteful spending during a recession. Even a Keynesian peacenik, one imagines, could think of some clever ways to put people to work such that they do not add to the productive capital stock, yet still paving the way for a return to full employment.

Which brings us to the buried tubes of money. As Mike noted in response to a question on the comments board, Keynes once described a truly silly way for the government to put people back to work. Professor Hockett corrected him on some minor details, but the basic story was right, as far as it went. Keynes really did describe a plan to have the government hire thousands of unemployed people to go into the forests and bury tubes filled with money in unmarked spots. He did not, however, say that the government should then hire other people to dig up the money.

The context of the money tubes suggestion makes quite clear that it was a sarcastic joke. The import of the joke, however, was not to make the point that "it doesn't matter what we spend it on, so long as we spend it." That is true during a recession, and it is an absolutely essential insight, as far as it goes; but the point that Keynes was making was much deeper. Keynes was, in that passage, ridiculing "the captains of industry" for their self-satisfied adherence to what we would now call (thanks to one of Keynes's disciples, John Kenneth Galbraith) the conventional wisdom. Specifically, Keynes said that the problem of inadequate spending should be an occasion for engaging in public investments, such as building adequate housing for the poor. The captains of industry, however, will always soberly warn us that having the government build housing for the poor is bad business, for all of the reasons that were already old hat in the 1930's.

What do the captains of industry (today known as Big Business) think is good business? Sending people out into the wilderness to dig holes in search of money! Keynes was, in other words, noting that the people who were against "wasteful spending" thought nothing of having businesses hire people to extract gold from the ground -- even though there is no good reason for any country's monetary system to be based on gold. (Note that people like Glenn Beck today are hawking gold as "real money" and "a safe investment," in response to Obama's flight into socialism, communism, Nazism, and his father's fevered Kenyan dreams.)

The brilliance of Keynes's example of the money tubes, therefore, was actually in its second step. After the government-hired workers had buried the money, entrepreneurs (who are ever assumed to be hard-headed and always rational in their pursuit of profit, mediated by the market to guarantee efficient outcomes) would then organize companies to hire workers who would go out and find the tubes, dig them up, and then bring the tubes of money back to the entrepreneurs. This, the captains of industry would agree, is good business. (I'm tempted to invoke the immortal line, "It's a series of tubes!" but I just can't figure out a way to make it relevant.)

The money tubes suggestion was thus a way to show that the implicit priorities of the moneyed classes were (and still are) deeply perverse. People being hired to do useful things like build houses, hospitals, and schools? Preposterous! People being hired to dig up pieces of paper? All hail the profit motive and Sound Money!

Of course, no government would want to do anything so silly as to hire armies of people to bury tubes of money in the first place. Unless they had no choice. If the political culture is so degraded that valuable public investments are off the table, simply because of the (repeatedly-disproved) belief that the government can never do anything right, then it is time to opt for choices that are politically thinkable and that at least have the virtue of putting people back to work -- even though they do so without creating long-term value.

Today, sadly, the political culture is even more degraded. Productive public investments are off the table, jobs programs are off the table, and government spending to hire privately-employed workers is off the table. Only spending cuts, and tax cuts for the rich, remain. Which makes that idea about the money tubes look pretty smart by comparison.

7 comments:

Michael C. Dorf said...

Neil,

Many thanks for the illuminating correction/clarification. I'd like to think that somewhere in the recesses of my brain I recalled that the point of the original example was to illustrate the folly of gold-standardism relative to deficit spending, and that this hazy recollection led to my confabulation of the example chosen by Keynes (a series of tubes) with my leprechaun-inspired version (pots o' gold).

Charles Wolverton said...

Neil -

A mostly OT question. I had always understood the post-WWI situation in Germany as you describe it:

The German ... prolonged economic disaster (... made much worse by the victorious allies' insistence on receiving compensation payments ...

But IIRC, in "Lords of Finance" (which I mostly just skimmed) the author suggests that during those critical years altho the threat hung over Germany, she never actually paid much of those reparations and for a while even had a booming economy which crumbled due to ... excessive consumption and debt! (How could any country be so foolish?)

Could you say a few words on the true story??

Bob Hockett said...

Many thanks for this, Neil,

Good to have you back and keeping us on the straight!

By way of some additional context, for those who might be interested, I believe that Keynes argued vigorously - and prophetically - for abandonment of the gold standard and a permanent return to (what had been the WWI era's necessary experiment with) fiat money during the 1920s, both in the Tract on Monetary Reform and, more polemically, in the essay Auri Sacra Fames. The gist of the argument, as I understand it, was that by holding the money suppy hostage to the accident of how much precious metal - which K tartly called a 'barbarous relic' - happened to be dug up each year, adherance to the gold standard prevented monetary authorities from reflating an economy in slump - such as Britain's was in the 1920s after the Bank of England returned to the gold standard at pre-WWI parity. It is a measure of Keynes's good sense that no monetary authority or serious economist today maintains or advocates a precious metal-based currency. One only hears such proposals from venal cranks.

The buried money story, for its part, I always took to be in significant measure about the overproduction problem in a capitalist economy. Per K, production gradually comes to outrun the macro-economy's capacity to consume as that economy moves beyond a subsistance level of production. Malthus, Hobson, and others had argued such before, but had never managed to clarify the mechanism by which this occurred. Keynes did: it happens by dint of diminishing MPC as wealth accumulates (especially at the top of the distribution), resulting ultimately in the slowing of production until it falls back into synch with consumption and what ever investment is sustainable. The buried money story served as a nice metaphor for the absurd paradox, as K called it, of poverty in the midst of plenty - where there's productive capacity to keep all comfortable and well fed, accompanied by organizational incapacity to keep people employed doing so.

Mike's earlier confabulation, as he humbly put it, and Neil's explication, now nicely draw out a nifty little link between these two Keynesian arguments - one that I had altogether missed!

Welcome back again, Neil,

Bob

Neil H. Buchanan said...

In response to Charles, I'm afraid I'll have to punt. I'm not a historian, and if the story that I've always thought to be true has now been revised, it's either rank revisionism or some good new historical writing. My money is on the former, mostly because this new explanation for Germany's inter-war problems sounds too much like a concocted morality tale to be applied to the current U.S. situation. Again, however, I'm simply not sure. I'm just very suspicious.

Thanks to Bob for further filling in the details, and for drawing out the connections.

Bob Hockett said...

In partial reply to Charles, and agreement with Neil, I should say that I'm suspicious of the 'excessive consumption and debt' account too -- at least the consumption piece of it. The important thing to note about the debt piece, however, is that it is entirely consistent with the tale of those draconian 'reparations' imposed upon Germany after the first War. By the mid to late 1920s it had become clear that Germany would not be able to keep up with required payments unless it not only boosted foreign exchange reserves all the more by widening the gap between exports and imports, but also borrowed on the strength of that prospect -- in effect, 'refinancing' its reparations debt. Unfortunately, the world economy's sinking into depression in the early 1930s, accompanied (and exacerbated) by increasingly 'protectionist' tariff and exchange rate policies, pretty well dashed the German export-led growth plan. But not before Germany had borrowed heavily through a new govt debt issue put together by several big NY investment banks. So Germany went into a crisis not unlike that experienced by the Latin American economies in the 1980s and the Asian 'tiger' economies in the late 1990s; it still owed heavy fixed debt obligations, but was no longer able to export enough to keep paying.

Incidentally, as many DoL readers will recall, Keynes warned in advance about all of this too -- not only in the celebrated Economic Consequences book (which brought his first taste of celebrity), but also in many newspaper, journal, and radio-broadcast polemics over the course of the 1920s. Unfortunately it was all largely to no avail, owing to intransigence on the part of American and French politicians in particular, whose silly sactimonies eerily anticipated much that we hear today from the right.

Cheers,
Bob

Charles Wolverton said...

"the debt piece ... is ... entirely consistent with the tale of those draconian 'reparations' imposed upon Germany after the first War."

I don't presume to rise even to the stature of David in confronting any Goliath who knows their history, but just as a point of logic I must note that accumulation of debt is also consistent with consumption spending and that debt per se is a direct problem only if it is actually repaid (just ask AIG). On the other hand, I take your point about debt being - in a sense - fungible.

As is all too frequently the case, the full story is apparently quite complex, so I now know to avoid oversimplifying it. Thanks for the history lesson, Bob.

Bob Hockett said...

Thanks, Charles,

Overconsumption would certainly be consistent with debt, as you point out, and I definitely hope not to be taken to hold to the contrary. I believe that the principal determinant of post-War German debt, however, was indeed that reparations bill, which it paid on over the 1920s and into the early 1930s. Remaining reparations debt was ultimately forgiven, I think, in the early-mid 1930s when it was finally recognized widely that the slump rendered continued payment unsustainable. I'll double-check the history here, however, to see whether I've missed any important consumption-related bits of the story.

Thanks again,
Bob