“Those who fail to study their history are doomed to repeat it.” –  George Santayana

Over the last couple of months, we have begun to see President Obama’s  strategy for addressing our current economic condition. His economic team has been focused on evaluating how the current conditions mirror those of past decades in order to glean some ideas about how best to move forward. Like Obama’s presidential campaign motto of “Change”, we are seeing how his presidential economic perspective adheres to the “Change” ethos.  Inarguably, change must surely occur, but we should take care not to forget the lessons of the past, so we might avoid revisiting the same flawed thinking and the mistakes such thinking yields. Like historian and Pulitzer Prize winner David C. McCullough said, “History is a guide to navigation in perilous times. History is who we are and why we are the way we are.” Corrective action uninformed by historical context is useless.  In short decisions about the future are not well made in the absence of clear perspectives about the past.

On January 8, 2009, the Wall Street Journal printed an article entitled “The New Old Big Thing in Economics: J.M. Keynes”, by Sudeep Reddy (www.online.wsj.com). This article discusses how our current economic condition mirrors the environment of the 1930s and goes so far as to assert that economist J.M. Keynes’s philosophies and methodologies helped save the U.S. during the historic economic crisis we know as the Great Depression. A former Clinton White House economist stated, “The situation [today] is so severe that we’re all Keynesains again.” It is important that the Obama administration looks to policies of 32nd US President, Franklin D. Roosevelt and his economic team as a historic precedent for solving economic challenges of this magnitude.  The time has come to leverage history and to use its lessons to refuel hope and spark stimulation.

In a previous article, we wrote about revisiting the fundamentals of the Laffer curve. It is now time to revisit the principles of J.M. Keynes.

J.M. Keynes: Keynesian Economics

J.M. Keynes is one of the acknowledged founding fathers of the field of macroeconomics. Based on the principals of Alfred Marshall, Keynes underlying economic philosophy is built upon the idea that – in the world of supply and demand, inflation and deflation, unemployment and employment – not all things are equal.

In his 1936 book The General Theory of Employment, Interest, and Money, Keynes explored the idea that “savings and investment were independently determined. The amount saved had little to do with variations in interest rates which, in turn, had little to do with how much was invested.”  Further, Keynes shared with his contemporaries the idea that changes in saving patterns amongst individuals was dependent upon changes in one’s desire to consume.  Changes in consumption patterns Keynes said, resulted from marginal, incremental changes to income. Consequently, investing was determined by the relationship between expected rates of return on the investment and the rate of interest.

Because of this phenomenon, Keynes was a strong advocate of enacting government policy designed to enable the government to use fiscal and monetary measures for alleviation of the adverse effects of economic recessions, depressions and booms. In his 1965 book entitled, "We are All Keynesians Now”,  renowned economist, Milton Friedman asserted that Keynes's central theme can be summed up by the statement “the modern capitalist economy does not automatically work at top efficiency, but can be raised to that level by the intervention and influence of the government.”  Simply, Keynes believed that active government policy can stimulate and restore any economic condition.

Keynes argued that the solution to depression was to stimulate the economy through a combination of two approaches:

1.) A reduction of interest rates

2.) “Government investment in infrastructure—the injection of income results in more spending in the general economy, which in turn stimulates more production and investment involving still more income and spending and so forth. The initial stimulation starts a cascade of events, whose total increase in economic activity is a multiple of the original investment” (Blinder, A., 2002, Keynesian Economics).

Keynes took a step further in his analysis, injecting a bit of psychology into the economic discussion noting that the attitudes and confidence of workers have a material effect on the state of the economic world. Thus if the government could reestablish confidence and a positive outlook through government action, the economic state would in turn improve.  Like country singer Willie Nelson said, “Once you replace negative thoughts with positive ones, you’ll start having positive results.”

It appears that Keynes’s thinking is what may be behind many of President Obama’s economic appointments: Lawrence Summers, Timothy F. Geithner, and Christina Romer.  All three of these individuals have a rich background in macroeconomics and fiscal and monetary policy. Furthermore, in a speech on January 8th, 2009, the then President-Elect Obama unveiled a plan for extensive domestic spending to combat recession, which also reflects Keynesian thinking.

If Obama and his appointments continue to follow the Keynes model, we should expect four years of “New Deal” style policies, a surge in government spending, which will eventaully led to an increase in taxation. The new millennium Keynesian economy will be driven by Federal investment into areas beyond the dams, roads, and bridges generated during the first “New Deal” era.  The "New" New Deal will be built upon investment into education, healthcare, infrastructure, and biotechnical advances spurred by President Obama’s lifting of the ban on stem research.

Through these policies, we have and must continue to avert a financial tail spin. Only time will tell if current stimulation was able to strike a balance between doing too much and not doing enough. A new “New Deal” is a way to keep us afloat. However, it is important to remember the original “New Deal” policies didn’t end the Great Depression--World War II did.  Thus we must remember the words of J.M. Keynes, “Successful investing is anticipating the anticipations of others.”