It is marvellously calming to pick up a hitherto unread piece by Keynes at a time like this. For some reason, a number of the epoch-making economists of the past were also wonderful writers – I am thinking Smith, Keynes, Friedman and Hayek, whether you agree with them or not – and it is nice to be subject to the prose of the best of them. (Not Ricardo though, I don’t think I have ever got anywhere with him).
Keynes’ “How to pay for the War” (nice Prospect article here) is think-tank pamphlet in length, based upon a few long articles for the Times, and clad in the sort of stiff brown cardboard that suggests the first answer to his title is “begin by economising on book coverings”.
What is calming is the beautiful writing and clear thought, rather than the ready provision of applicable answers to our current situation; in fact, the situation Keynes analyses with such brisk clarity is almost diametrically different to today, and to what he spent the middle years of his career fixing. In early 1940, Keynes had no doubt that the British economy could and would produce far more. GDP was growing explosively. He was confident to the point of blitheness on this point, writing casually “we shall, I assume, raise our output to the highest figure which our resources and our organisation permit” – the problem the whole world of economists grappled with unsuccessfully for much of the 1930s.
Instead, he identifies the problem as how to restrict consumer spending – the less of which there is, the more there is for war production. And with GDP and therefore national income soaring, you cannot just let people’s earnings turn into their consumption – again in his words, “we cannot allow the amount of mere money in the pockets of the public to have a significant influence … on the amount which is released to civilians”. How to break the link between the higher incomes the civilians are all earning by working more and harder, with the amount of stuff they get to enjoy?
What follows is for me an object lesson in clear exposition, as Keynes walks us through the various methods possible and proposed for this – forced saving, voluntary saving, price inflation, taxation and so on – all of the time keeping the reader’s mind on the essential underlying logic of the thing: that people are “paying” for the war by consuming far less than they are producing. He glides smoothly into the justice of the matter, even attempts some IFS-esque analysis of which classes (by income) ought to suffer which restrictions, and cleverly muses on how his proposed answer (basically, forced savings*) might contain a ready-made answer to the post-war problem of a sudden spike in unemployment. Force everyone to save now, get them to release it later when we are going to need a lot of work for the demobilised, it all fits beautifully. And in the meantime distort markets and preferences as little as you can – try to avoid rationing or dictating who exactly should consume what. It is true what they say – Keynes was never trying to replace capitalism, but to save it.
It is not hard to see the diametric differences to today. Here, we have plummeting GDP, and consumption much lower than we would want it. We want those retail-facing industries working again – if they can do so safely. If national accounting identities hold then incomes are plummeting too, and the most lauded of the government’s interventions are those like the Coronavirus Job Retention Scheme that try to keep said incomes high. With the exception of healthcare and some other businesses like delivery, no sector of the economy is running hot.
There are some similarities, such as soaring government borrowing, and its mirror image, higher private saving, I assume (I carried out a brief analysis of my household and found collapsing spending on restaurants, coffee, entertainment and transport, and slightly more on groceries and household goods) – in particular for those with incomes intact. But only the most optimistic V-shape-er can now think that all those pent-up savings are about to release a symmetric recovery in spending when the healthcare rules allow (but for a monetarist view on this, worth reading Simon Ward).
Keynes makes it look easy, and I am sure it was anything but. It is probably a function of his genius that he makes the most extreme financial challenge the British state would ever face look soluble in 70 or so pages.
But I’ll say it: the problem he addressed feels analytically more straightforward than the one we face now. Do we want higher demand now, or later? How serious is the supply problem? Is it even useful to think in terms of supply or demand (the same restaurant may be suffering a supply problem – same space, fewer tables allowed – and demand problem – smaller clientele willing to risk their health)? The country is almost certainly facing a structural adjustment, affecting urban economics, the future of the office, the size and role of the state, even how we think about social insurance – but when is the right time to start work on that? Are market forces working? Landed property values are almost certainly much lower now – surely one of the key values of land is that it where you physically meet, and that now comes with a steep negative externality – but is the system robust enough to cope with a sudden adjustment to the trillions of pounds tied up in land? And what about corporate equity – thousands of balance sheets have taken a heavy hit in last three months (my god, it has been only three months) and surely an ideal government policy would somehow address this– but how on earth can you do that in a way that is fair?**
Oh, and I understand that the question of how to relax the lockdown itself may throw up a dilemma or two, and even some ugly politics. Then, after that (or perhaps during it all …) we have the fiscal dilemmas, and the financial risks to the state. In a sense, the whole problem is a cousin to the one Keynes was musing about: there is damage to be taken, and so who should take it? But back in 1940 it was an actual war, and actual wars are conducted by governments, who seize all the levers, and force all the payment. That is no longer possible now.
I have the sort of worrying mind that wakes each day convinced nothing is soluble. It is only by the end of a fast run and a stiff coffee that I feel remotely up to the task of thinking about difficult things. For this one, I struggle even to know what to worry about first. So I do hope this era turns out its own Keynes.
*In his words “a proportion of each man’s earnings which must be deferred – withdrawn, that is to say, from immediate consumption and only made available as a right to consumer after the war is over”. That is forced savings in my book though he adds a nice progressive twist (p10-11)
**Jim O’Neill has co-authored an article calling for this, but in my view does not really tell us how