By MIKE MAGEE
John Maynard Keynes, the famous British economist, was born and raised in Cambridge, England, and taught at King’s College. He died in 1946. He is widely recognized today as the father of Keynesian economics that promoted a predominantly private sector driven, market economy, with an activist government sector hanging in the wings ready to assume center stage during emergencies.
Declines in demand pointed to recession. Irrationally exuberant spending signaled inflationary increases in pricing, eroding the value of your money. Under these conditions, Keynes encouraged the government and central bank to adjust fiscal and monetary policy to dampen the highs and lows of the business cycles.
Keynesian economics were popularized in America in the 1930’s by a University of Minnesota economist who would go on to become Chairman of Economics at Harvard. For this, he is often referred to as “The American Keynes”, and was highlighted this week in the New York Times by Nobel economist, Paul Krugman, for his association with another tagline, “Secular Stagnation.”
When that economist, Alvin Hansen, first described the condition, he was working on FDR’s Social Security Plan. He defined it as “persistent spending weakness even in the face of very low inflation.” Krugman’s modern-day description? “What we’re looking at here is a world awash in savings with nowhere to go.”
Krugman is not the only economist sounding the alarm. Larry Summers, Harvard economist and Treasury Secretary under Bill Clinton, recently wrote, “The relevance of economic theories depends on context.” On the top of his list of current environmental concerns restricting investment and growth is the strong belief that the number of available workers is in steep decline.
Just days ago the CDC added fuel to the fire when they reported a 2020 birth rate in the U.S. of 55.8 births per 1,000 women ages 15 to 44. That was 4% lower than in 2019, and the lowest recorded rate since we started collecting these numbers in 1909. Our lower birthrate is further aggravated by declines in numbers of immigrants and a flattening of the movement of women into the workforce. Add to this the general aging of our population. To put it in perspective, Americans over 80 now outnumber Americans 2 and under.
But Summers’ concerns extend well beyond worker and product line shortages. More significant in his view are two other factors. The first is low demand fueled by population stasis. As he states, “These demographic developments eliminate the demand for new capital goods to equip and house a growing workforce.” Or stated in a different way, growing families buy things – lots of things. Shrinking families do not.
The second trend that concerns him is information technology enabled efficiencies that further dampen demand. Why? Because products today work much better and for much longer. Just one example – today’s $500 iPhone has the power of a Cray supercomputer from a generation ago. And, with no end in sight, Summers says consumers will likely continue to withhold spending in anticipation of lower prices in the future.
To make matters worse, IT connectivity has also increased renting and sharing opportunities. You don’t need to own everything (or anything) yourself. There appear to be few limits on what you can share.
What Krugman and Summers agree on is that there is plenty of money in the system, and more to come, through government infusions. But growth requires participation, not sitting on the sideline. Hansen’s “secular stagnation” suggests a reluctance to invest in the immediate future. If unchecked, it can lead to a prolonged, Japan-like, period of deflation and hardship.
Krugman’s prescription is to spend, and spend big, in government-sponsored projects that draw out citizen participation, and encourage mobility, productivity, and confidence in the future. He says we need to ignore “deficit hawks”, noting that the current deficit (twice as large as in 1990) is carrying an interest payment burden only half as large as three decades ago because of persistent low interest rates.
Krugmen believes “cheap money” should be advantaged, but in a purposeful and targeted manner. What are his two top priorities?
1) Infrastructure projects – to create immediate jobs in and for the communities they serve.
2) Universal Health Care – to promote mobility, productivity and confidence in our combined and interdependent futures.
Alvin Hansen died at the age of 87 in 1975. Hansen’s first book, Full Recovery or Stagnation, published in 1938, was prescient in suggesting that, if employment and growth are stagnant, in an economic cycle, government intervention may be required to stimulate demand.
A few years before his death, Paul McCracken, chairman of the President’s Council of Economic Advisers under LBJ, said of Hansen: “It is certainly a statement of fact that you have influenced the nation’s thinking about economic policy more profoundly than any other economist in this century.”
Now, a half-century later, it appears that Full Recovery or Stagnation deserves a careful reread.
Mike Magee, MD is a Medical Historian and Health Economist and author of “Code Blue: Inside the Medical Industrial Complex.“
