Intro to Keynes

[Beet]

This is a speech I am going to give tomorrow at my Toastmaster's Club. It's going to be given to a  random group of people so I dumbed it down as much as possible. Please critique.

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Here in the Washington D.C. area, we are very blessed. We are blessed because in this region our economy is relatively stable. When we read in the news about the lack of jobs or the struggling middle class, we can’t necessarily see it all around us unless we know someone personally who is struggling. However, we, too are affected by the broader world, where many cities and countries are struggling economically.

But nowhere are things as bad as they are in southern Europe. I have read that in Italy, the youth unemployment rate is 40 percent. Four in ten young Italians have no jobs. Spain, the youth unemployment rate is over 57 percent. More than half of young people in Spain have no jobs. In Greece, it is six in 10. Across Europe, 24 percent of people in the young generation have no jobs. And the world leaders of European countries, the IMF leaders, and the expert economists seem to have no answer.

There was a man who lived 100 years ago who saw many of these same problems in his lifetime. He lived through the Great Depression and two world wars. His name is John Maynard Keynes. Keynes was a brilliant student who went to the best schools in England, Eton and Oxford Cambridge, and was offered a professorship of mathematics. After World War One, he wrote a book correctly predicting that Germany would not be able to repay the harsh demands England and France wanted to impose on it, and that they would only infuriate the Germans and weaken its democratic government. Keynes’ ideas for how to respond to the Great Depression also apply to Europe today and could be used by European leaders to solve their economic crisis.

Keynes gave us three major insights into economic depressions that can help European leaders today. First, Keynes saw that unemployment was a problem not only for those who did not have jobs, but for everybody. Second, Keynes saw that deflation, or falling prices, makes overcoming debts much harder and reduces overall business activity. Third, Keynes understood that the root cause of many economic problems in one country is its trade balance and relation to other countries. What I like the most about Keynes is that many of his ideas were counter-intuitive.

A popular analogy is to think of an economy like a household. When a household cuts spending, it saves money, and it becomes richer over time, because it’s incoming is unchanged while its spending is lower. Some people then say that if a government, business, or consumers cut spending, they too will become richer over time. Keynes saw that this analogy doesn’t work because a household and a government or other large economic actors aren’t the same. While a household’s income is fixed as long as the people in it have jobs, in an economy, everybody’s income depends on someone else’s spending. So if the government, business, or consumer doesn’t spend, it means someone else doesn’t get income.

Let’s take away all the numbers and just look at the real world. When consumers don’t spend, businesses need fewer people and factories to make products. This leads to unemployment, to people sitting at home not working, and factories falling idle. By not using these human and physical resources, they are being wasted. Hence, even though countries like Greece and Spain cut spending, they are still getting poorer because they are wasting their resources. With half a country’s young people not working, no wonder they are not getting rich. You have to work to get rich.

[Beet]

Secondly, Keynes knew that when you have high debt, deflation is a bad thing and a little inflation can be good. Recently, for the first time in 45 years, Greece began to experience deflation. The most intuitive thing to think is that low prices are good. However, Keynes saw that this will make it harder for Greeks to pay off debts, because past debts are paid off by present and future income. But deflation reduces present and future income, while leaving the level of past debts the same. So deflation effectively increases the load of debt. Inflation does the opposite.

Let me tell you a story. In the mid-1970s, New York City was going bankrupt. U.S. President Ford refused to bail out New York. One paper said the President had told New York City to “drop dead.” However, ten years later, New York City was rebounding strongly. Its debt problem seemed to have disappeared. How did New York City do it? It didn’t work any miracles. The late 1970s was a time of high and double digit inflation in the U.S. The value of New York City’s debts from the late 1960s and early 1970s quickly fell in value compared to the prices of the 1980s. This is not to say that inflation is good a thing. However, if your problem is high debt, then inflation is not a bad thing either.

Third, Keynes understood that it is important for a country to maintain a relatively even balance of trade over the long term. Let me tell you a hypothetical story of Jack and Jill. Jack believes that it is very important to save, and Jill loves to spend. So Jack lends some of his savings to Jill, who comes into debt to Jack. Jack complains to Jill, “why can’t you pay me back?” Jill says, “I have no money. Let me come clean your house. Then you will pay me, and I will in turn pay you back.” But Jack says, “I don’t want to spend money to let someone else clean my house.” Jill says, “Let me cook you a meal. Then you will pay me and I will have money to pay you back.” But Jack says, “I don’t want to spend money on cooked meals.” Jill says, “Let me chauffeur you to work, then I will pay you back with the salary I earn.” But Jack says, “I don’t want to spend money on a chauffeur.” Finally, Jill had no money and defaulted on her loan from Jack. Who is the more responsible one? On the surface, Jack is more responsible. But Keynes would say neither of them were responsible. Jack by being so miserly, lost his money anyway. At the end of the day, money only represents real world things of value, such as food, services, or transportation. Although Jill was irresponsible with money, she intuitively understood this, while Jack didn’t. What is the point of constantly saving money if you are never going to spend it?

In Keynes’ day, these were not just abstract debates. Keynes grew up in a rich household in pre-World War I England, then the world’s top superpower. He then saw Europe descend into war, Depression, and then war again. He turned against his teachers and the ideas that he grew up with because he saw they weren’t working. When one man accused him of inconsistency, he answered, “When the facts change, I change my mind. What do you do, sir?” Today, Europe should learn from what Keynes had to say. Greece has been in recession now for over 5 years, even longer than the U.S. during the Great Depression. This cannot go on forever without the kind of political crisis that shook the world in the 1930s. Time is short. Now is the time to learn from Keynes.