As I watch the price of oil drift down toward $25 per barrel, I am reminded that certain economists held strong opinions about the way governments should react to dour news. As you may know, The Wolf Camp’s official economist is John Maynard Keynes (pictured above). (The Wolf Camp holds no official political bent – the Camp is agnostic.)
I doubt I exaggerate when I say that “Official Economist of the Wolf Camp Blog” is about the most prestigious title held by 1st Baron Keynes. If he were here today, I have no doubt he would say so himself.
This choice was simple because his theories… work. For example, look to different approaches to the 2008 financial crisis. The United States spent into the downturn – remember TARP and the “bailout” of big banks? While deeply unpopular, experts from across the spectrum lauded the move as the reason the downturn was not worse, and longer.
To see the effect of the counterpoint, one need look only across the pond. In the EU, many countries chose austerity – deep cuts in public spending, cutbacks in goods and services provided by governments, etc. The results are striking: Spain’s unemployment rate spiked above 25% and its economy has yet to fully recover; Greece nearly defaulted on its sovereign debt and faces a lost generation; Cyprus came this close to failing as a state; etc.
There are earlier analogs. For example, Japan tried austerity too in response to its fiscal crisis in the 1990’s. Although it has largely recovered, Japan has never restored its former financial glory. (Remember all those movies threatening the takeover of America by Japanese companies?)
“But what about Germany?” You ask. “They’ve recovered from the downturn quite well.” “Ah, yes,” says I. But they were Keynesians through and through! Sure, our Saxon friends preached austerity and used their economic might to ensure cutbacks in failing economies. Within the friendly confines of their own policy, however, the Germans slashed interest rates (even going NEGATIVE in the heart of the storm), which paid banks to make loans with German money for free! How Keynesian of them! (One of the central tenets of Keynesian economics is that the ebb and flow of the economy can be controlled by monetary and fiscal policy.)
Look at the results. In the last few years, the two healthiest economies, in real terms (I’m ignoring China because it is becoming increasingly obvious their economy is not fully understood) are the United States and Germany… once again validating Keynesian strategies.
The predictions of Keynes were also validated in his own time. For example, Keynes rightly predicted that the austerity inflicted on Germany by the Treaty of Versailles would lead to another war, and it did. Keynesian theories were used by the Western alliance to fund wartime operations, with well-known results. Keynesian programs in the United States largely stopped the collapse of the economy, which was in the process of an eventual (if far-off) recovery when Pearl Harbor was attacked.
By now, most readers are likely asking themselves, “Why is The Wolf Camp waxing philosophical on long-dead economists?” Well, hopefully I’ve laid a foundation of credibility for what I am about to say.
West Texas is in trouble, and it’s taking the wrong road to get out. For example, leaders in my current hometown continue blather about the need to reduce spending. It’s said so often that become a mantra. No spending on roads, no hiring of government employees, no re-vitalization plans (unless they include new facilities for city government officials, but that is a matter for another post), etc. Local roads are terrible, schools are terrible and health care is questionable. Yet, leaders across the board demand that we reduce spending now.
This is the exact opposite of what should be done. Instead, there should be a major push to employ people in beneficial projects – such as infrastructure. The oil and gas business is labor intensive. The people who work in the oilfield can be quickly re-trained to work on roads – giving them gainful employment while also giving the price of oil a chance to recover. Expanding social programs would allow out-of-work administrators to work for the government for a time, while at the same time providing benefits to other stakeholders in need of support.
OF COURSE this would lead to criticism. I said Keynesian theories worked, not that they were popular! Think about it this way… if the private sector is not hiring (indeed, if the private sector is reducing employment), and the public sector refuses to hire, what is left? Unemployment. And the nasty part about unemployment is that the unemployed also need greater support from local agencies – right when non-Keynesians are slashing budgets!
I’m not some genius. I’m just a guy who likes history. Look to the past as your guide for what will happen in the future. It’s not a perfect marker, but it is a pretty good one. West Texas can choose to be like Post-Depression era America or it can choose to be like present-day Greece. So far, government officials are choosing the latter. Let us hope they change their mind.