Tuesday, November 25, 2008

Having What It Takes

A few years ago, at my restaurant job (I was still also working as a teacher then), I got a dollar bill that had a URL stamped on it. the URL "www.wheresgeorge.com" was stamped on it. I was curious about the bill, so I switched it with one I had in my pocket and took it home.

I checked the website and discovered that it was a bill tracking site. You could register (for free) and enter the bill and when someone else who used the website entered it, it would report back to you when and where it was entered. It was way cool. About half the bills I've encountered and entered have been entered again. A couple have been re-entered three more times; one of those bills has traveled up to Canada and out to California.

Each of the bills I've entered since that first one-- 27, according to the site-- have gone from place to place, people, businesses, vending machines, etc. Only a tiny fraction of the people who encounter the bills actually bother to enter them, but certainly each of the bills are parts of dozens of transactions after whatever transaction brought them to my hands.

Enter John Maynard Keynes.

Do yourself a favor sometime: go to the library or go on www.half.com and get yourself a copy of economist Robert Lekachman's book "The Age of Keynes." Even if you, unlike me, don't find economics fascinating (I minored in it, along with history, in my undergraduate), it's a readable book. Keynes was a fascinating guy.

His academic career was meteoric; he went to Eton Prep and then Cambridge. In his early life, he was primarily romantically involved with men, notably the artist Duncan Grant, with whom he remained lifelong friends. In 1918, he met the famed Russian ballerina Lydia Lopokova, whom he married, apparently happily, in 1925. He invested successfully-- he lost a fortune at the onset of the Great Depression, and quickly regained it-- and had an impressive art collection.

His first entry into the history books was when he worked as Britain's financial advisor at the negotiations for the Treaty of Versailles, the treaty that ended World War I. The Allies wanted to impose harshly punitive reparations against Germany. Keynes argued against this, pointing out that long-term economic and political stability would be gained only by assuring that former enemies were able to be solvent and economically integrated with the rest of Europe. The Allies pursued reparations, and Keynes quit the commission in protest.

Of course, Keynes was right. The Allies forced ludicrously high reparations on Germany. In order to try to pay the reparations, Germany started merely printing money. This resulted in a new phenomenon: hyperinflation. German money quickly lost its value, with inflation rates in the hundreds and thousands of percent. The German government started printing notes with huge values, as the money lost its value. There's a story I've heard, that is probably apocryphal, about someone bringing a laundry basket of money to buy some groceries. The person left the basket for a moment and when they returned, the basket was gone; the thief had left the money.

Whether the story is true or not, what is known is that the reparations were a disaster. There was no money to rebuild a war-battered Germany, and unemployment sky-rocketed. There was economic desperation in Germany. This desperation was a large part of what paved the way for the rise of Hitler and the Nazi Party.

Back to Keynes. He weathered the Great Depression and in 1936 published what is generally considered to be not only his most important book, but one of the most important books on economics ever published: General Theory of Employment, Interest and Money. He examined the concept of "aggregate demand:" the idea that the total income of a society is what is spent and invested. He examined a paradox, one that the Great Depression had made painfully clear: when there was an economic contraction, there was a ripple effect. Like that dollar I registered on www.wheresgeorge.com, each dollar spent or invested is spent or invested again repeatedly, each time adding another dollar to the Gross Domestic Product, the modern measure of economic health. If there is an economic downturn, each of the dollars not spent sends a ripple as well-- there is a "multiplier" either positive or negative.

The problem, then, with a severe economic downturn, is that in order to turn it around, you have to spend more money, even if you have to borrow it to spend it. This ran contrary to the wisdom of the time that said that you had to reduce government spending during an economic downturn. In fact, to the contrary, reduction of government spending during an economic downturn could have the perverse effect of worsening the recession or depression. One means of this economic "pump priming" was through government projects.

As World War II started, Keynes that in order to avoid inflation, the War should be paid for through higher taxes, rather than deficit spending.

As the Allied victory became more assured, Keynes became part of the team shaping the post-war world. He was part of the Bretton Woods meetings that formed a formal international monetary system.

Unfortunately, Keynes would not see much of the post-War world that he helped create; he died of a heart attack. His ideas are still in use today. The United States, through the Federal Reserve system, has, for the most part, avoided the extremes of depression and hyperinflation by adjusting interest rates and the money supply.

Through a combination of factors-- the massive export of jobs, massive export of money for imports (primarily petroleum), a hugely expensive war and a lack of effective controls on banking and investment, we've got the worst fiscal crisis since the Great Depression.

So what do I think about the future, near and distant?

Believe it or not, I feel pretty good. I've been impressed with the people that Senator Obama is surrounding himself with. Some people have asked the question "How can we get change, when he's surrounding himself with insiders?" Let me mention one name: Jimmy Carter.

Jimmy Carter was elected in the wave of disaffection with government caused by the Vietnam War and Watergate. During his campaign, he was openly hostile to people in Washington. When he got to Washington, unsurprisingly, even people within his own party, like House Speaker Tip O'Neill, were uncooperative. As the United States faced new challenges, such as the Energy Crisis and the Iran Hostage Crisis, he had trouble getting things done.

While I would argue that Carter was a better president than he is generally given credit for (his stand on Human Rights was particularly impressive), he has gone down in history as a pretty ineffective president. It doesn't matter how good your intentions are if you can't get things done.

One of the things that most rankled me during the campaign was that Barack Obama was inexperienced. They couldn't be more wrong. Obama spent seven years in the Illinois State Senate, from 1997 to 2004. He represented a complex district; it encompassed Hyde Park, an affluent, racially mixed neighborhood that had an elite school, the University of Chicago, and Chicago Lawn, a very poor African-American neighborhood. He had to represent this district, with its complicated electorate in an Illinois State legislature filled with legislators representing people from downstate districts that were hostile to Chicago. And you know what? He got things done. He was widely considered an outstanding legislator.

Mr. Obama is a rarity-- a combination of pragmatism and idealism. He's smart, open to ideas and knows how to get things done. He seems to realize where we've gone off the rails and has some pretty good ideas as to how to get back on track. And he's surrounded himself with people who seem to know how to get things done. And he seems to know how to combine both old ideas and new.

So far I'm liking what I'm hearing and seeing. For instance, he understands that a sustainable energy policy kills several birds with one stone: it increases the number of jobs here in this country, it decreases the hemorrhage of money out of the country due to oil exports and decreases global warming. He seems to grasp that people need jobs with a living wage, reasonable taxes, a government more responsive to their needs and maybe a few other things like a better rail system, schools they can count on to actually educate their kids, and a sane foreign policy. And he appears to understand that in order to get these things done, good intentions are not enough; you need to surround yourself with people who know how to get these things done.

I think that Mr. Obama has his work cut out for him. But my guess is that he's a guy who could discuss Keynes at length. The smart money is on him.


Natalie said...

I think you are right on the money with this one.

SkylersDad said...

It is embarrassing for me to admit I did not know about this man. Thanks for another interesting post JY.

LegalMist said...

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FranIAm said...

What a great post Johnny Yen. And any man who can discuss Keynes, history and use the word apocryphal all in one post is aces in my book.

Happy Thanksgiving.

Johnny Yen said...

I sure hope so! This last bunch has done so much damage. It's exciting to see someone who's smart and able. And can pronounce "nuclear."

No need to be-- unless you studied economics or had a strong interest in it, you probably wouldn't know who he was. I actually meant to call him "One of the most important guys you may not have heard of."

Thanks for the award!

It's my thwarted life as a rock critic; I want to use words like "eponymous" and "shibboleth" as well...

dmarks said...

" And can pronounce "nuclear." "

Jimmy Carter pronounced it "nucular". And he was much more of a nuclear expert than all the Presidents we have ever had put together. Because of that, I don't bash anyone for mispronouncing it that way.

Shibboleth.... isn't that an H. P. Lovecraft monster?

Johnny Yen said...

I can't remember how Carter pronounced it, but I do know he was a nuclear engineer; he worked on reactors in the Navy.

Leonesse said...

Great post.

MacGuffin said...

Excellent post, Johnny. I hope your optimism is well founded. Frankly, I'd take pragmatic measures over idealistic ones right now, not that they have to be mutually exclusive. Also, general competence would be a nice change which Obama seems to have plenty of (thank GOD). I think Obama should pretty much disregard any worries concerning deficit spending, at least that's what Krugman's position is.