Will Pump-priming the Economy Help Post-Covid?

Because I operated a company that had the primary objective of developing technology for new businesses in the chemical arena, economics interested me. We can all be smart looking back, but what about now? What should we do about the economy during virus times? So what are some options? This will take more than one post, but first, what is the best example in history of getting out of trouble? What tools are available?

In 1936, John Maynard Keynes published “The General Theory of Employment, Interest and Money”, and when he did so, he should have known it worked for getting out of depression because when Adolf Hitler took over in Germany, the economy was in a mess, with horrendous unemployment and terrible wages for most of those actually employed. Hitler promised to fix things, and he did, by implementing the policies that Keynes was later to publish. By 1936 the German unemployment had essentially disappeared and Keynes would know that.  Hitler was to provide the world with horrors, but early on his economic policy was exactly what Germany needed.

Keynes’ approach was essentially that in a depression the state should provide money to prime the economy, and when better times arrived, pay it back. In my opinion, therein lay one flaw: when better times arrive, do politicians want to pay it back? Er, no. Better (at least for re-election chances) to leave it as debt and inflate it away. (Hitler never had the opportunity to pay it back, because he had other interests.) It is usual to say that Keynes’ economics collapsed in the 1970s with persistently high inflation and high unemployment. One could argue that at least part of the inflation was because the governments refused to pay back, and instead kept borrowing. I have no doubt the counter to that will be, look at now – there is no inflation, and governments are borrowing heavily. Maybe.

If following Keynes, does it matter what the money is spent on? In the German example, the money went on infrastructure, and on providing the expansion of industries for making things. There was an unintended consequence after the war: once the West Germans started to run their own economy they had another economic miracle. Thanks to Hitler’s apprentice schemes, there were a large number of highly skilled people required for manufacturing, and they had factories. The allies bombed cities but mainly left the factories alone. German manufacturing reached its highest point of the war in late 1944. As an example, they made ten times more fighters then than around the Battle of Britain. (That they had run out of skilled pilots was a separate issue.) 

Keynesian economics involved high taxes on the wealthy and some claim such tax rates prevent innovation and general expansion. In the US, from 1953 to 1964, the top tax rate was 90%, and it did not drop below 70% until about 1982. This period corresponded to the US being the most developed country in the world. The tax rates did not stifle anything. Of course, there were tax exemptions for money being sent in the desired direction, and that may well be a desirable aspect of taxation policy. The death of Keynesian economics was probably a consequence of Milton Friedman, as much as anything else. The stagflation in the late 1970s convinced politicians they could no longer spend their way out of a recession. An important observation of Friedman was that if policymakers stimulated without tackling the underlying structural deficiencies, they would fail. They did not and fail they did, but that was partly because the politicians had ceased to look at structural deficiencies. Friedman was correct regarding the problem, but that was because in detail Keynes’ obligations were overlooked. No more than half of the Keynes  prescription was implemented generally. So, where does that leave us? Is Keynes applicable now? In my opinion, the current attempts to spend our way out of virus difficulties won’t work because there are further problems that apply, but that is for a later post.

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