Out of a Hole

John Maynard Keynes, the guy who reminded us that, "in the long run we are all dead" also had some useful advice for reviving an economy in freefall. Keynes' view of the Great Depression can be summed up in a few bullet points:

• Job losses were unimaginably severe, meaning that demand for goods was extremely limited.
• Because demand for stuff was limited, there was little reason to make more stuff.
  
• The government should therefore step in and create demand by:
  

1. Buying lots of stuff
2. Giving people jobs so they'll buy stuff

• Debt can be worried about when there's money again, because after all, in the long run, we're all dead anyway.

The funny thing is that it worked. Some say it was the Second World War that did it, but what was that if it wasn't the government buying lots of stuff and giving people jobs so they'd buy stuff?

Today, we're in a not altogether different position. After a $1 Trillion rescue of the banks that had us all overleveraged, and after $787 Billion's worth of Keynesian demand creation, things are stirring somewhat. With how unpopular the bank bailout is, and how uneasy the stimulus has made people, it's no wonder that it took a war to see this policy bare fruit last time around.

And I tend to agree. $787 billion in cash helps, but in a $14 trillion economy, it's hardly a substitute for people with good jobs demanding expensive things. The bank bailout was ugly and maddening, but the alternative would have been far, far worse.

Metaphor Time!

Like a doctor performing a quadruple bypass on an obese patient who smokes, drinks and eats meatlover's pizzas for breakfast, the government should have demanded better terms on their agreements with bankers. But tasked with saving an economic life, we really had no choice in whether we'd keep our nation's (and the world's) heart unclogged and pumping. That said, now is the time to address diet and habits, not pre-op.

This economy is turning around, but I worry about the long run more than Mr. Keynes seemed to. Our education system, our transportation system, our tax system, our health care system and who knows what systems I'm missing all confront a problem that Keynes didn't have.

After the Second World War, the rest of the world was either poor to begin with, or newly poor through the ravages of war. Today, those places are mostly doing well, in large part thanks to our aid after the war, and our ongoing demand for their products long after. We may consume more than any other people on Earth, but in the process, we've been giving all those people much, much more than we get credit for.

The rest of the world no longer needs our help as they did then. We need to help our own system of production. We need to help our own citizens to play ball with the competitors that we created. After Keynes' demand problem abated, and thanks to many of its policies, it was American dynamism, inventiveness, and openness that took over. That has not changed. What has is the rest of the world is a much better place to do business, and we are the same or marginally worse than before. To maintain our standard of living in this century, it will require some new investment. It'll take some thinking for all sides of American political ideology.

First, universal health care is far more than a moral imperative. Think of all the would-be inventors and entrepreneurs who keep a job because they need the benefits. Think of all the untapped potential wasting away in cubicles across the county. Ensuring coverage for all is not a hand-out. It is an essential investment in our future productivity. Read this for more.

Second, it is not enough to help people. We must also help businesses. The United States has one of the highest corporate tax rates in the world. Making even a small reduction in that rate could mean the difference between firms locating their operations here, or in some other place. Read this for more. We can make up the lost tax revenue somewhere else.

Health care increases for corporate tax decreases. A decent ideological trade-off, nice and neat.

In both instances, the incomes of the wealthy would be a good start. They pay less than half what they did back when we were doing well. Surely they would trade a lower tax on their corporate investments or a higher tax on the wealth that could grow unimaginably in the decades to come as a result. A value-added tax isn't a bad idea either. Everyone else does it, and while it is essentially regressive, it curbs consumption, keeping money invested in local endeavors.

Tax the wealthy for taxing consumption. Another ideological trade-off to pay for it all.

We can do this. We can fix today's problems. It just takes a little vision and some moxie on the part of our leaders. This time, it is the public that must induce demand for change.