1. John Maynard Keynes: Depression DestroyerA Look at the Contributions of the 20thCenturys Most Influential Economist Presented by: Jeff Keele, Ph.D.

2. Economics in the 1930sGreat DepressionDust BowlNew Deal PoliciesKeynesian Economics John Maynard Keynes 1936 3. The Context:Business Cycles and Depressions Business Cycles Recurring booms and busts in economic performance All economies face them Deep, long busts are called Depressions 4. Depression Cycles InAmericaU.S. Depressions 1819 1836 1857 1873 1893 1921 (brief) 1929 GREAT DEPRESSION None Since WHY??? 5. Causes of theGREAT DEPRESSIONBoom of the Roaring TwentiesCoolidge era policies favorbusiness and wealthyConcentration of Wealthincreases Gap between rich and poor expands National economy overly dependant on conspicuous consumption 6. Causes of theGREAT DEPRESSIONSpeculative run in the Stock MarketMargin tradingLeveraged purchases stocks bought with borrowed moneyRampant, undisciplinedspeculationStock prices unrealisticallyhigh 7. Poor BusinessPractices Huge land speculation wave in Florida Resort developments multiply Shares hawked to cash-flush banks, corporations, and wealthy individuals 8. Florida Land BubbleMany bought on credit, most for speculation.Land prices quadrupledHuge paper profits for speculatorsTHENSlowing economy led to a sell-off Falling prices created a credit crisis Credit crisis created a panic and collapse of thewhole Florida land market. Large investors lost enormous paper assets 9. Slowing Economy +Florida Land Bubble Collapse= Stock Market CrisisStock market crash destroys paper wealth Stock values plummet Stock no longer covers collateral requirements Margin calls issuedDepositors try to withdraw cash to covermargin calls on their stock 10. Stock Market Crisis Banking crisisBanks unable to pay depositors Panic Runs on banks Large-scale bank failures Deposits uninsured Depositors lose 11. Depression CyclesDownwardNewly wealthy now find themselves newlypoorConsumer spending plummets especiallyfor consumer luxuriesNew orders dry up for producersProducers lay off workersWorking classes lose income and decreasespending 12. DepressionCyclesDownwardCongress passes Smoot-Hawley Tariff Act Shuts off imports in an attempt to protect domesticproducers Foreign nations respond by shutting off Americanimports Efficiency and wealth gained from world tradeevaporates 13. Government ResponsePresident Herbert Hooverand US Government?? Wait for the market to correct itself Pump priming? well, maybe, but didnt DO it.Dominant economic paradigm:Laissez FaireGovernment will just mess it up worse.Let it fix itself. 14. ClassicalEconomic Theory Adam Smith and the Invisible Hand Competition and profit motive are core Economies tend toward efficient equilibrium when left alone Governments should not meddle 15. Classical Economic Theory David RicardoSystematized Smiths workRicardian Equivalence:Government spending can not stimulateeconomic performanceStimulation will be exactly counterbalanced: By offsetting taxes if paid for by tax increases By offsetting savings if paid for by governmentdebt 16. Enter:John MaynardKeynesBy 1930: Already the mostinfluential British economistPrep School at Eton Gifted in math, classics and historyBA 1905, MA in 1909 at KingsCollege, Cambridge Math first Economics motivated by interest in politics 17. Keynes BioLectureship at CambridgeWWI:Worked for the Adviser to the Chancellorof the Exchequer and TreasuryFinancial representative for the Treasuryto the 1919 Paris Peace Conference 18. Keynes BioRepresentative of FinanceDepartment at the VersaillesPeace Conference in 1919 Argued against reparations They would crush Germany &cause more conflictPublished:The Economic Consequences of the Peace in 1919A Tract on Monetary Reform in 1923Treatise on Money in 1930 19. Keynes BioPublished his magnumopus, The GeneralTheory ofEmployment, Interestand Money, in 1936Classical EconomicsChallenged core paradigm of Markets may not always tend toward an equilibrium at full employment Government has a role in stimulating economic performance by stimulating demand 20. Keynes ThesisDepression could becomea long-term equilibriumoutcome Financial shocks and gloomyexpectations couldpermanently suppressaggregate expenditures(demand) Large-scale unemployment -both human and capital -could result 21. Keynes ThesisSolution: Stimulate AggregateExpendituresOnly the government is capable ofsufficiently massive stimulationGovernments should SPEND their wayout of a depressionCounter-cyclical Fiscal Policy: Cut taxes and increase spending inrecession/depression Increase taxes and cut spending in timesof inflationary expansion 22. Keynes Open Letter toPresident Roosevelt New York Times: December 31, 1933Broadly speaking, therefore, an increase of output canoccur only by the operation of one or other of three factors.Individuals are induced to spend more (but they dont have it)Business are induced to spend more by increasing theircapital and employment (but they have excess capacity and donthave existing orders to justify expansion)orGovernment must create additional current incomesthrough the expenditure of borrowed or printed money. 23. Keynes Open Letter to President Roosevelt Thus, as the prime mover in the first stage of thetechnique of recovery, I lay overwhelming emphasis on theincrease of national purchasing power resultingfrom governmental expenditure which is financedby loans and is not merely a transfer through taxationfrom existing incomes. 24. Keynes Open Letter to President Roosevelt "The setback American recovery experienced this pastautumn was the predictable consequence of the failure ofyour administration to organize any material increase innew loan expenditures during your first six months of office.The position six months hence will depend entirely onwhether you have been laying the foundations for largerexpenditures in the future." 25. Roosevelts NewDeal policies fitKeynesSuggestions:Works ProgressAdministrationCivilian ConservationCorps 26. New DealProgramsResettlement Administration Relocate families to new, planned communitiesFarm Security Administration Rural rehabilitationRural Electrification Administration Charged to bring electricity to farms, etc.Tennessee Valley Authority Flood control, electrification, fertilizers in Tennessee Valley 27. New Deal & Keynesian TheoryKeynes model Provided: Scientific justification for New Deal Theoretical guide for New Deal expansion Confidence that short-term deficits were OKFresno AuditoriumOakland-Alameda Bridge Imperial Canal, CA 28. More Keynes-compliant Policies of the 30sUnemployment benefitsSocial Security InsuranceProgressive income taxesAll of theses are automatic stabilizers 29. More 1930sSafeguards againstEconomicDepressionFederal Reserve Building,1937 FED: Federal Reserve Board strengthened Regulates banking practices and money supply Guards against bank failures and maintains a stable money supply FDIC: Federal Deposit Insurance Corporation Created to guarantee depositors money if banks fail Works to maintain confidence and avoid financial panics 30. More 1930sSafeguards againstEconomic DepressionSEC: Securities and ExchangeCommission strengthened to guardagainst stock market collapse Tighter accounting and reporting practicesimposed on publicly traded corporations Limits placed on margin trading Strengthened controls on insider trading 31. More 1930sSafeguards againstEconomic Depression Strengthened Labor laws Protect workers rights Improve distribution of income Avoid some of the income inequality that made the 20s boom so volatile Maintain laborer income to maintain private sector demand 32. Keynesian modelssuccessesLess volatile business cyclesNo major depression sinceimplementationGreater economic security for workingclassesPolitical stability in advanced worldeconomies where Keynesian policiesare practiced 33. Keynesian models weaknessesInflationary tendency Government stimulation may cause inflation Keynes discounted this possibility for times of deep recession/depressionDeficit spending Tax cuts and increased services are easy to sell tovoters in recessions Tax increases and reduced services are a hardpolitical sell for elected officials even in inflationaryexpansions 34. Keynesian models weaknessesGovernment deficits compete with privateinvestment for investment money Crowding out effect May reduce net private investmentGrowing government sector Inconsistent with Lockean view of minimalistgovernment Government may become more intrusive 35. ContemporaryMacroeconomicTheory and PracticeDr. Ben Bernake, FED Keynesian Base:Chairman Automatic stabilizers well entrenched to mellow out wide swings in the business cycle Monetarist Anti-inflation Program: Greenspan and now Bernake guarding against inflation through cautious Monetary policy 36. Contemporary Dr. Milton Macroeconomic FriedmanTheory and PracticeSupply Side theory focusing on tax incentivesfor investment -- a la Milton Friedman Reduced tax burden -- to be balanced partially bypromised economic growth and partially byreduced government spending Claimed as model for Reagan and G.W. Bushadministrations, but not really implemented Both cut taxes but failed to balance with reduced spending leading to large deficits that counteract the expected benefits 37. Keynes Is Still Key Despite important later developments in theory and practice Monetarist theories Supply Side and Neo-Classical theories Contemporary Macroeconomic theory and contemporary policy are firmly grounded in Keynes ideas from the 1930s.