Forcing "investors" to truly invest
by David Atkins ("thereisnospoon")
Thomas Geoghegan of The Nation has a very intriguing article that should be the subject of a great deal of discussion right now amongst those trying to determine how best to curb Wall Street's predatory influence on our economy while reining in both unemployment and deficits. Mr. Geoghegan appeals to the actual writings of famed liberal economist John Maynard Keynes to ask precisely what Keynes would do if confronted with America's modern economic problems.
The answer Geoghegan gives isn't quite what one might expect, and it's well worth some serious thought.
For starters, he points out that Keynes was an adamant opponent of deficits. But the deficits Keynes particularly despised were not national deficits, but trade deficits:
In 1936, when Keynes wrote his classic—The General Theory of Employment, Interest and Money—he was emphatic on this point: no country, ever, should run up any kind of trade deficit, much less the trade deficit on steroids we are running. Of course, in 1936 and for years after, the United States was the biggest creditor country in the history of the world. So Keynes never worried about our being a debtor country—rather, he spent much of his last days begging the United States to get other countries out of debt. If he came back and saw the colossal external debt we run now, he would be pushing for a serious plan to bring it down just as hard as he’d be pushing a stimulus for full employment.
I admit, Nation readers, that standing in line at Whole Foods, I occasionally pick up The Economist, if only to go to the back page and see the merchandise trade deficit the United States and other countries have been running in the past twelve months. It’s scary: $680.9 billion as of July 9. That puts us near $0.7 trillion in the red. But in the chart, much of the world is in the black. OK, the two US wannabes, Britain and Spain, have trade deficit disasters. And some have too much. “Low-wage” China has a surplus of $172.5 billion. “High-wage” Germany beats out China, with a surplus of $188.4 billion. But when I run my finger up this chart to the US deficit, it’s a shock. It’s as if I’m pressing on the sucking chest wound in the world economy.
Keynes would rattle that ripped-out page in front of us.
So, that would put Mr. Geoghegan in the deficit hysteria camp and against Paul Krugman, right? Not so fast. He gives Krugman big props and again reminds us that we're talking about the trade deficit, not the national debt here:
Keynes believed that practical leaders would always see the supreme importance of keeping the country out of external debt—indeed, he seemed to see this as the first duty of the state. For Keynes, in his later years, it was the economic analogue to defending one’s country. Avoiding an external debt was an act of patriotism and national self-preservation in a sense that even reducing unemployment was not. It’s “fighting for freedom,” in Skidelsky’s phrase. Keynes would not believe how Obama, the Tea Party, the Democrats, the Republicans—our leaders—pay so little attention to our whopping trade deficit, as if it had nothing at all to do with our slump.
The right, the Tea Party, the Concord Coalition, Mr. Bowles and Mr. Simpson, Peter Peterson—they want to bring down the federal deficit. The left, our side, generally wants to go deeper into debt and get to full employment. Then we’ll bring down the federal deficit. Then we’ll have full employment and all will be well.
But until we bring down the trade deficit and fix our balance of payments, there is no way out of debt.
I won't go into the details of Geoghegan's arguments against both traditional liberal and conservative approaches and bogeymen. I find some of his reasoning potentially suspect in this section, but the whole thing is worth a read. His conclusion, though, is what is truly interesting. In the end, according to the author, America will not get back on its feet without investment in actually productive economic activity by the wealthy.
Again, here a traditional progressive winces as the author sounds like he's veering perilously close to trickle-down economics, but Geoghegan has a delightfully subversive point. The fact is that there is massive unequal concentration of wealth in this country. Most of that wealth is sitting on the sidelines. Even if that wealth were to be confiscated in the form of taxes, it wouldn't solve two basic problems: first, the reason that the wealth became concentrated so unequally in the first place (a point persuasively argued by Hacker and Pierson in Winner-Take-All Politics), and second, the fact that government spending on public works might even balloon the trade deficit even higher. Without curbing the trade deficit, it will be difficult to create full employment and more importantly a sustainable economic future. There does need to be growth in investment in the private sector that increases productive, exportable activity in America to bring down trade deficits.
Mr. Geoghegan leads us, then, to the brink of Austrian economics via Keynes himself. But then, just as a progressive reader begins to be inclined to toss the article aside and wonder what happened to the progressive Thomas Geoghegan we used to know, he does a quick turn to highlight what he, by way of Keynes, sees as the real problem: the fact that Wall Street and the wealthy have stopped actually investing in productive investments. His argument has a subtle beauty and a ring of truth to it:
The real point is to get them to invest—not save, not speculate in financial instruments, but invest in widgets we can wrap and ship and sell abroad. And Keynes would put that question to the left, to us: How can we get the rich to invest?...
Everything in the United States is set up to encourage the rich to put money into financial instruments rather than long-term investments. What would Keynes do? Get the rich to think outside the Wall Street banking box. Get them to put money into the part of Main Street that used to trade abroad. How do we do that? For starters, put in usury laws—limits on interest rates. In a general way, cut down the appeal of being a creditor and not an investor.
Keynes quotes Locke on this point: “High Interest decays Trade. The advantage from Interest is greater than the profit from Trade.” And by trade, Locke does not mean day trading.
Now, as Richard Posner recently wrote, part of the problem with understanding Keynes is the vocabulary. So, for example, it is puzzling to us to hear that the rich don’t make enough “investments.” Don’t they invest like crazy? They invest in stocks, bonds, financial instruments, all sorts of things we would never call loans. But to Keynes these “investments” are loans. They’re liquid. They often have a fixed rate of interest. Corporate takeovers on Wall Street may look like “investments,” but if you get up close, many are just loans—i.e., transactions in corporate debt. Keynes could pick up the Wall Street Journal and give the real name for one “investment” after another: loan, loan, loan.
Strip away the pretense of investment, and too many a financial instrument is either a loan or just the inflated price of a paper asset. When Keynes talks about the importance of usury laws, he means laws limiting interest rates but also laws and regulations that hold down profits on financial instruments.
And that's precisely the point: Wall Street is not actually engaging in productive activity on behalf of the economy. The entire reason that market speculation is supposed to help an economy, according to theory, is that markets are thought to provide the most efficient allocation of capital. But when rent-seeking and pointless lending speculation on paper assets is more profitable than actual investment in real productive activity, financial markets start to become more of a burden to an economy than an asset:
Keynes would point out that the rise in the US trade deficit—which became serious in the 1980s—coincided exactly with the astonishing deregulation of the financial sector. We knocked down usury laws. We allowed the first end runs around the Glass-Steagall laws.
Wait—that’s our problem? Not China or the world economy? Well, it’s hard to channel Keynes now, but look at the back page of The Economist. Not just Germany but a lot of other high-wage countries are doing well in the global economy. It’s hard to account for the difference with labor cost alone.
Readers who took Economics 101 (or Economics 1001, as it later became as a result of inflation) may remember something about a “liquidity preference.” That means keeping money “liquid.” For Keynes the first duty of the state is to ensure that the “liquidity preference” is low, to prod people not to keep their money liquid but to lock it up in a long-term investment where it will not be so easy to get.
To some, this all sounds very nice for the future, but right now we need to get people out there to repave the interstates. Fine, let’s get back to work: but as long as the trade deficit keeps on draining us of wealth, the middle class will keep on going down the drain.
In the end there is one way out of this economic mess—Keynes would say we have to shock, push, lure and sweet-talk the rich in this country to part with their money and start enterprises that get us out of debt. But how are we going to do that? We can’t even get employers sitting on hoards of cash to hire a few extra workers.
Geoghegan's suggestion? Look at Germany and how it has managed to maintain a positive trade surplus:
1) A national single-payer-style health system.
2) Corporations that include an influential section of organized labor on the board of directors.
3) Increased regulations on pointless and harmful speculative market activity.
4) Government-run banks on the model of the Sparkassen, that would step in to provide real lending to the productive parts of the economy when the major lenders refuse to do so. Such a government-run bank exists in North Dakota, and has been very successful in that state.
There is much that might be debatable in the article. But it offers good food for thought that moves away from the tired tax vs. anti-tax/stimulus vs. austerity debate in America, and gets more to the heart of what ails our democracy and our economy in the first place. Yes, taxes on the wealthy need to be increased and corporate loopholes eliminated. But in some respects, as Hacker, Pierson and now Geoghegan are arguing, those tax rates are more symptoms of a broken system than the causes. And yes, we need stimulus to bring down unemployment, but that in itself won't solve the core problems that got us here.
The problem in a nutshell is the deregulation of the financial sector, and the prioritization of speculative investment in non-productive activity. If we can solve that problem, we'll be on our way to solving other problems as well.