"The Keynes Solution" (5) by Paul Davidson - Keynes's New Thinking - Debt

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Continued from here.

The message is: government debt is not necessarily a problem; even a large proportion of it relative to GDP may be a boon, depending on circumstances. This strikes me as worthy of careful consideration, and impresses me more than an unqualified condemnation of government expenditure.

However, Davidson kicks the fifth chapter off with a passage that confuses me, because I seemed to have learned from MMT that a balanced budget is a burden on the private sector, and so is a fortiori a government surplus. But I suppose, in feeling confused, I had forgotten that this is only so when the economy is in a brittle or depressed condition.  Apparently, it is the case that when the private sector is in deficit with a corresponding government surplus, it is sufficiently resilient to deal with this as long as economic conditions are buoyant.

The prosperous decade of the Roaring Twenties saw a decline in the national debt. BY 1929,the total debt [government plus private sector debt?] had been reduced to $16.9 billion [from $25.4 billion in 1916], or approximately 16 percent of GDP. This reduction in the debt was a result of of the federal government spending $5.8 billion less than its tax revenue receipts between 1919 an 1929. [Does this tell us anything about the net debt position of government? Not on a yearly basis, on which it could have fluctuated into and out of a surplus.] In other words, through most of the decade of the 1920s, the federal government savings were substantial. Yet the economy continued to grow and prosper. This experience indicates that if and when the private sector is spending sufficiently to buy most of the products that industry can produce, there is no need for government to deficit spend merely to maintain a prosperous economy.

Davidson, p. 62

He then tells us the story of an increase in national debt [the term presumably referring either to government debt or a compound mainly comprising government debt] to 40 % of GDP by 1936, with a salubrious effect on the stressed economy, a crash in fiscal year 1937 following cuts in government spending, and the resumption of economic growth once spending was re-initiated in 1938, leading up to a considerably improved economy in 1940, having accumulated a national debt of approximately 44% of GDP.

When the United States entered World War II in 1941, the fear of deficits and the size of national debt were forgotten. In the years from 1941 to 1945, the GDP more than doubled while the national debt increased by more than 500 percent. By the end of 1945, the national debt was equal to approximately 119 percent of GDP. Rather than bankrupting the nation when the war ended, this large national debt promoted a prosperous economy.

By 1946, the average American household was living much better economically than in the prewar days [A remarkable observation, a little baffling from the perspective of German history, but the American situation  was different.] Moreover, the children and grandchildren of the Great Depression-World War II generation have not been burdened by having to pay off what was then considered a huge national debt. [Why not?] Instead, for the next quarter of a century, the economy continued on a a path of unprecedented economic growth and prosperity. At the same time, the inequality in the distribution of income was significantly narrowed. It was the golden age of economic development for the United States.

Ibid. pp. 62-63

What Davidson is saying is: governmental deficit spending has a pivotal role to play in smoothing economic cycles; while there is no need for it in a flourishing phase, it ought to be resorted to to pick up a foundering economy, when "no other spenders [are] willing or able to assume the role of market demand generator" (p. 64). Reinvigorated in that way, capitalism will take care of the worries about national bankruptcy, inflation, or intergenerational exploitation. 

Of course, there remain questions as to whether other factors may account for the upswings attributed to heavy fiscal intervention; and there is no doubt a difference between the forced recruitment of all resources in the style of an inefficient command economy, and the jump-starting of an economic recovery that marshals the efficiency of capitalist forces, which latter Davidson seems to imply - but this is not a topic for this post. Anyhow, Davidson's story of benign government spending surely piques my attention.

The moral of the story is that we have nothing to fear about running big government deficits when government is the only spender that can increase market demand for the products of our industries and thereby maintain a profitable entrepreneurial system. For government to spend less in the hopes of keeping down the size of the national debt would mean causing market demand to remain slack and thereby impoverishing both our business firms and our workers.

Keynes's idea was that capitalism works best when spenders cause healthy growth in market demands and thereby generate profits and jobs for the community.

Ibid. p. 63 - emphasis added

In the heat of ideological controversy what is perhaps not seen clearly enough is that Keynes believed in capitalism and made a point of keeping it in good working condition. Far from being an anti-capitalist, Keynes held a view of capitalism that was only deemed anti-capitalist because it deviated from the classical paradigm which was widely thought to be the only conceivable account of capitalism. Perhaps Keynes attracted more friends of a leftist persuasion than he may have felt comfortable with had he lived a little longer.

When on account of the war people were swamped by waves of ideological agitation momentarily more urgent than anti-capitalist sentiment, a laissez faire of a peculiar kind took place, a  Keynesian experiment conducted behind the backs of the people:

When the war broke out and no further thought was given to the size of the government debt, government spending quickly pushed the economy to a profitable full-employment status.

Ibid. p.64

The interesting question is, of course, what does "a profitable full-employment status" mean? Does this status provide us with a paragon for the rightening of a modern peace-time economy?

Continued here.