• Peter Lyons

Keynes: Lessons from the Master during Extreme Economic Times.

Tenants can't pay their landlords, businesses can't pay their suppliers, firms can't pay their workers, borrowers can't pay their mortgages. Everyone blames each other. Conflict and fear abound.

John Maynard Keynes is an intellectual hero of mine. He was arguably the greatest economic thinker of the past century. He was the father of Macroeconomics which is the study of the entire economy. It's big picture stuff. The current economic crisis is definitely a Macro economic crisis, writ large. Keynes can teach us some very important lessons about what is happening, and how to respond. How to reduce the pain.

Lesson 1: One person's spending is always another's income. Total spending in an economy largely determines total incomes. This determines the total level of output (GDP) of the economy. This largely determines the level of employment and unemployment in our economy. At the moment Total spending, total incomes and output in our economy is plummeting. This is causing unemployment to surge.

Lesson 2; The situation described above will not suddenly " fix" itself. Keynes believed during an extreme economic downturn " animal spirits" play a huge role in determining the state of the economy. Animal spirits could best be described as business and consumer confidence. Keynes believed that when confidence has evaporated an economy can remain in a nasty slump for a very long time. He was writing during the Great Depression.

Lesson 3; Keynes believed very low interest rates would have little effect in reigniting economic activity during a deep slump. Households and businesses lose their mojo to borrow and spend. Banks are wary of lending. He said in such a situation using low or zero interest rates to spark the economy was " like pushing a piece of string."

Lesson 4; Keynes believed in a concept called " the paradox of thrift" during a deep slump. People would be concerned about unemployment or lower incomes and debt levels. They try to save more , or repay debt. But if everyone tries to do this at the same time it cuts overall spending and incomes and output and employment. What makes sense for each household makes the macro situation even worse.

Lesson 5; Keynes believed during a nasty economic slump the only part of the economy able to maintain national spending, output and employment was the government. In the short term this could be done through significant emergency benefits to those who have taken the hit. They are the most likely to spend this money which would help stimulate the overall economy. In the longer term this would necessitate major public works projects that would provide employment and incomes and enhance future prosperity.

Lesson 5; Keynes understood that during a nasty economic slump the biggest tragedy was not large government deficits or public borrowing. This would not " crowd out" the private sector. He wasn't advocating communism. Quite the contrary. He was advocating providing life support to the private sector during an extreme economic situation.

Large scale government spending during such an extreme situation is not "stealing" from future generations if it is done wisely. Future generations will suffer more if the productive potential of current generations is unnecessarily wasted. The biggest tragedy of the Great Depression was the unnecessary wastage caused by mass unemployment and lost output and incomes. Not to mention the political extremism and World war that resulted. Much of this was caused by poor economic policy responses to the crisis.

The current crisis is not a morality tale about winners and losers. It is not a purge of a broken economic system. Such an attitude invites unnecessary tragedy. We can make the current crisis much less harsh if we use good economic policy to navigate our way through it.

Peter Lyons is a regular columnist for the Otago Daily Times, teaches scholarship-level Economics and an author of several New Zealand economic texts. His inspiration often comes after a dram of whiskey. Just one mind you. So if you're ever stuck in a room full of economists, grab the seat next to him. For a conversation peppered with wit, wisdom and weirdness.

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