John Maynard Reagan Bailing Out AIG

First off, I would like to point out that Matt only found out what magneto trouble meant because of me. I was reading Keynes and asked Matt what it meant, then Matt googled it, and subsequently hijacked my curiousity for his own post. And now on to much less important matters...

I was struck by two different things while reading Keynes.

1. The interesting relationship between Reaganomics and Keynesian Economics

2. The central role of banking to the economy

At one point (pg. 121 to be exact), Keynes says that "If it were announced that some of our leading captains of industry had decided to launch out boldly, and were about to sink capital in new industrial plant ... we should all expect to see a great improvement in employment." Keynes brings up this example, as a counterargument to those that believe that government policy cannot actually create capital and jobs. Apparently, at the time, there was a somewhat popular belief that if the government were to spend to create capital and jobs, the government was not actually creating capital or jobs, it was just diverting this capital from private markets. Keynes attempts to defeat this point, by explaining that if some large private firms were to open a new factory, we would think it were a true improvement, and that the government is no different.

I bring up this part in Keynes, because it was specifically this counterargument that made me realize the closeness of the realtionship between Keynesian economics and trickle down Reaganomics. Keynes advocates government spending to build capital that will create jobs (through employment program of some sort). Reaganomics argues for tax cuts that will put extra money in the hands of the rich (although I am not sure they would admit to the rich part in public) so that rich people can invest in capital and create more jobs. While normally, the two are thought of as polar opposites, they actually are quite similar. Both rely on the use of savings to invest in capital and create jobs. Whether this savings is voluntarily used by rich people, or whether this savings is collected up as taxes and used by the government.

What is interesting is that apparently in Keynes time, there was a school of thought that advocated not using this savings at all. Keynes warns against the programs that attempt to reduce interest rates by reducing investment opportunities. This is interesting because, as far as I know, this school of thought is no longer even really present in economics. It has become a duality between Reaganomics and Keynesian economics. We now all agree we should invest money to build capital and make jobs, the question is who is in charge of doing it. I wonder if Keynes were alive today, what he would say about this. In the assigned reading at least, he does not seem to be arguing against trickle down economics, so much as he is combating some bizarre "safety first" view that seems to consist of a straight up dole for poor people and nothing else. The obvious advantage of trickle down economics is that you can count on the rich people to invest in industries that are economically efficient (where there is the most profit), while the government may or may not do that. This also could be construed as a disadvantage though, because industries that provide some kind of public good may end up underinvested if all the investment is left to the rich instead of the government. For example, we might lack a massive interstate system if the government didn't finance it, because there is not as much profit to be had there, but it may well be economically efficient to have it. In any case, it would be interesting to see how Keynes would balance these concerns.

The other point I was struck by, I will just touch on very briefly. In reading the third essay, I was struck by the sentence that said "it is the serious embarrassment of the banks which is the cause of our gravest concern" (Pg. 168). This point struck home, because obviously, we are in the midst of a banking crisis at the present time. Keynes description of how the banking industry basically set the scene for the Great Depression was interesting to me, because it made me realize that banking is really the only thing that can completely collapse an economy. You can have problems in other areas, but ultimately, to have a true economic disaster banking collapse is needed. Although, writing this, it seems to me this argument may be circuitous, as banking collapse may not always be the cause of economic disaster, but perhaps simply a necessary symptom of true economic woes. In any case, it seems that in the 1930s, banking held a central role in the economy, much as banking does today. Looking back at the errors of those times, I hope we can take better care of our banking system now to avoid our problems of the past.