"A sandy and false foundation"

Writing in his 1919 classic The Economic Consequences of the Peace, J.M. Keynes warns his English contemporaries that they are living on borrowed time. In the wake of the first World War, he observes, many felt a glow of triumph and renewed prosperity. Not only had their nation won the great struggle and crushed the wicked adversary, but now their economy was in a position to reap the spoils. What could go wrong? 

Keynes insists (and it would take less than a decade to prove him right) that the general economic crisis caused by these events had only been delayed, rather than averted. It might be possible to disguise for a time the real cost of the war and—worse still—the peace imposed after it, but eventually everyone on the globe would feel the effects of the victorious Allies' decision to effectively shut down and dismantle their defeated foe's economy. 

As a result, the apparent prosperity of the wealthy countries was built on a "sandy and false foundation," Keynes wrote, whose real nature they had not begun to perceive. A generation of Europeans grew to accept as normal and inevitable a level of sustained economic growth and freedom from economic terror, such that they did not realize how fragile and ephemeral it might really be. One is reminded of the warning of Edna St. Vincent Millay:

All will be well, we say, it is a bit, like the rising of the sun,/ For our country to prosper; who can prevail against us?/No one./The house has a roof; but the boards of its floor are/ rotting, and hall upon hall/ The moles have built their palace beneath us, we have/ not far to fall.

It is hard not to feel that Keynes (or Millay, for that matter) is offering us a "distant mirror" that reflects our own time. After all, we are living in a country that has managed to preserve a screen of prosperity through fiscal intervention, even as we sit atop a global economy that is in tatters. For much of the world, the crisis became apparent as a direct result of the pandemic, which contracted economic activity globally. For those of us in the prosperous West, we are only catching up now. 

We were able to put off the day of reckoning through unprecedented macroeconomic interventions. The central bank boosted asset prices so heavily and Congress engaged in such prolonged deficit spending that the economy seemed to be doing better than ever. If we had any money invested, we ended up richer than before the pandemic. If we earned a salary or wage, it probably increased as the economy approached full employment, due to the massive infusion of demand from these fiscal and monetary interventions. 

So great was the success of macroeconomics in weathering these shocks, that the old-fashioned deficit hawks seemed to fall silent, and the new-fangled proponents of "modern monetary theory" (MMT) seemed to be utterly vindicated. See, they said, we told you. Deficit spending is almost never a problem. There is such a thing as a "free lunch." The government can spend without limit because it can always print more money.

The Nemesis hovering over this optimistic scenario was always inflation, of course, which even the MMT people had to admit would be a problem if it ever escaped the leash. But, they argued, run-away inflation is not a necessary consequence of debt or deficit spending in all cases: it is simply what occurs when demand outpaces productive capacity. So long as the latter is growing, the government can print more money and run budgets year after year in the red. 

I suspect this is actually 100% true. The problem is that—in our present case—productive capacity did not in fact keep pace with demand. 

U.S. macroeconomic policy was able to stave off the demand shock from the pandemic. In fact, as a result of these interventions, demand increased dramatically. But these interventions were not able to do anything about supply, which really had been damaged by the global crisis of the pandemic (and now by the war in Ukraine). And when supply cannot keep pace with demand, as even the MMT proponents acknowledged, price hikes are the inevitable result. 

The main sources of the supply shock are well known by this point: the COVID-19 lockdowns in China that periodically cut off whole sections of its economy, as well as the war in Ukraine that has disrupted the world's supply of wheat, leading potentially to a massive spike in food prices and a looming global hunger crisis. 

But in the U.S. context, there is an additional factor: the shortage of workers. Indeed, in a recent interview on Marketplace, this was the only salient factor that Federal Reserve chair Jerome Powell named as an underlying cause of inflation. As he presented it, the root cause of the present inflationary spiral is simply lack of labor supply: there are more jobs in the economy than there are people to fill them, he said, and as a result everything is going to get more expensive to produce and therefore more expensive to buy. 

Now, the Fed has very limited tools at its disposal. It cannot change economic policy to increase supply of any commodity, or of potential members of the workforce. So when demand exceeds supply, the Fed can do only one thing to bring them back into equilibrium. Since it cannot raise supply, it must lower demand, which it does by making saving more desirable, consumer spending less so, and thereby decreasing overall economic activity and ultimately prices. 

The problem with this is that it amounts to deliberately slowing economic growth, and possibly tipping us into a recession. Does it have to be this way? In my view, it may well be the only rational course available to the Fed. But it is not the only one that our economy as a whole needs to take. 

After all, there are supposed to be other economic policymakers in the United States apart from the Fed (in theory). Even if Chair Powell can do nothing to boost supply and therefore must aim at demand, Congress and the president do not have such a limited range of tools. They could take action to actually boost supply, and then we could have an economy that continues to grow and price stability, in which case the MMT proponents would be partially vindicated after all.

How could they attain such an optimum? There is of course little they can do to address the consequences of China's "Zero-COVID" policy. That is a supply shock we are simply going to have to accept and weather, until the CCP regime decides to change course. But the labor shortage that Chair Powell named as a salient factor is one that they could address easily. Right now, after all, there are thousands of working age adults at the U.S. southern border who are asking for nothing other than to lawfully enter, join the U.S. workforce, and pay taxes. 

Instead of seeing these generous souls as our national salvation, however, newspapers and politicians (of all partisan stripes) are united in portraying them as a menace. The idea of thousands of people crossing the border daily to participate in the U.S. economy is described in neutral journlistic prose as a self-evident "crisis"—and this holds true whether one is reading Bloomberg, the Washington Post, the New York Times, the Wall Street Journal, or Fox News. 

This is a self-deception on a catastrophic scale. In reality, the U.S. could navigate one of its major supply shocks and bring supply into harmony with demand simply by permitting entry to the many people who want to come here, work, pay taxes (all without access to most public benefits). This would swell government coffers, solve the labor shortage, and allow the U.S. economy to continue to grow without so much inflation. 

But the U.S. public—including both of the major political parties and all the major newspapers—are instead in lockstep agreement that asylum-seekers and other migrants at the southern border must be kept out at all costs. They've decided that they would rather have a shrinking economy in which we will all end up poorer, just so we can keep it all to ourselves, than have a larger growing economy that we share with others.

Forget about the humanitarian iniquity for a second of denying shelter to so many people fleeing persecution and violence. From a purely self-interested standpoint, this is a monstrously perverse policy decision. 

Part of the problem, here as elsewhere, is that the feeling of scarcity engendered by economic crises promotes in turn all of the counterproductive and perverse behaviors that worsen the problem to start with.  The specter of a looming global hunger crisis caused by supply shocks triggers in many Americans' minds the image of a Malthusian rabble banging at our gates, desperate to be let in, with all the overtones of racism and xenophobia that come along with it. Most leap to the conclusion as a result that "there is not enough to go around," and we must hoard our own. 

In reality, economics are not zero sum in this way. To the contrary, what will almost certainly bankrupt the public benefits programs of the rich countries in the long run is having low birth rates and low immigration, leading to a dearth of working-age adults paying into the system. Likewise, what exacerbates inflation is boxing people out of the workforce due to xenophobia and racism. By contrast, a growing population could make everyone more prosperous, if we were only willing to share. 

But instead, the U.S. seems set on pursuing a "beggar-thy-neighbor" policy in a time of collective scarcity. Republicans have embraced white nationalism and xenophobia as their defining political brand: they of course will not save us. Democrats, however, are not showing themselves willing to advocate for increased immigration either. In one display of cravenness after another, they have embraced watered-down versions of GOP talking points and sought to exclude and deter asylum-seekers. 

While Democrats could brand themselves as the party of immigration—providing an effective counterpoint to GOP racism, nativism, economic isolationism, and policy perversity—they are hesitant to do so. Instead, they are trying to either ignore the issue or side with Republicans on issues like Title 42 (which multiple Senate Democrats are seeking to prolong). And many of their other approaches to inflation would be equally counterproductive. A recent bill went down to defeat in Congress that could have combatted so-called "price gouging" on the part of oil companies. Rhetoric from some populist Democrats blames inflation on corporate greed and rich CEOs just trying to increase their profit margins. 

Writing about the inflationary pressures of his own time, in his 1919 book, Keynes notes that these are classic wrong-headed responses to inflation. Denunciations of "profiteers," he notes, seek to falsely shift the blame onto individuals for what are really collective economic forces—ones of which they found themselves the unwitting beneficiaries, simply because they happened to possess capital in a time of inflation. "The profiteers are a consequence and not a cause of rising prices," writes Keynes. 

Moreover, trying to respond to these pressures with price controls, as anti-"price gouging" legislation seeks to do, will only exacerbate the problem—Keynes argues—by eliminating the incentive to produce (since producers can no longer sell at rates to recover the costs of production) and thereby causing shortages. 

The only remedy, Keynes advises, is to accept the fact that the global economy has become interdependent in practice. Modern-day social organization is not consistent with each country hiding within its own borders and producing everything that its own population consumes. Rather, it depends on economies specializing in different commodities and trading with one another. 

If such cross-border trade were to be suddenly cut off—as Keynes feared would be a consequence of the Treaty of Versailles and its punitive reparations—then it would prove impossible to feed with the produce of agricultural economies the many millions of people in industrial economies who depend on them to survive. 

Restoring high levels of immigration—and there is no easier way to do that than to simply start enforcing our own asylum laws again, and permit to enter the country and receive temporary work authorization the many thousands of people who are currently stranded at our borders, and who are only asking for a chance to work and feed their families, nothing more, and who could save our whole economy right now if we weren't more invested in our xenophobia than our own well-being—would be the simplest way for the U.S. to relieve inflationary pressure while preserving economic growth and prosperity. 

But Keynes's book also invites us to inquire into the wisdom of the sanctions policy that we are currently enforcing in response to Putin's aggression. After all, Keynes's book is above all a polemic against the doctrine of collective punishment in response to war—and the very fact that most of his arguments are pragmatic in nature makes it all the more powerful when he finally introduces the moral factor—the arguments from charity and human fellowship. 

However vital it is that Putin himself be punished for his invasion and deterred from ever pursuing it again, we must not lose sight of the fact that economy-wide sanctions also affect the innocent: ordinary, everyday Russians—including every infant and child born in that country—who did not choose this war and who are themselves the victims of Putin's autocracy. And as Keynes eloquently puts it: "nations are not authorised, by religion or by natural morals, to visit on the children of their enemies the misdoings of parents or of rulers." 

(I add in passing here that these moral arguments should apply even more strongly against the ruinous sanctions regime the U.S. has imposed on Afghanistan—a far weaker and more vulnerable country, and one moreover to which the U.S. owes a special historic debt, in the aftermath of our war in that country). 

But even if we were indifferent to the moral problem of collective punishment—or at least felt that it was a price worth paying for the sake of the broader deterrence objective—we have to recognize that the pragmatic concerns may not be in its favor either. The track record of sanctions actually prompting a change in regime behavior is very poor (viz. Iran, Cuba, Venezuela, Iraq under Saddam Hussein, and so on). 

And then we have the problem of the globe's economic interdependence. In the close of his book, Keynes briefly shifts his attention from Germany to the Soviet Union, which was then under an economic blockade from the West that is reminiscent of today's sanctions regime. Though Keynes advocates for mitigating or partially lifting the blockade, he admits that "There are many persons in whom such proposals will raise strong prejudices." 

After all, lifting sanctions—then as now—can sound like a proposal to compromise with the devil. Keynes then did not want to sound like a partisan of Bolshevik tyranny, and likewise I certainly do not wish now to suggest any sympathy with Putin's abhorrent regime or his actions in Ukraine. 

But, Keynes goes on: 

I ask [those who hold these views] to follow out in thought the result of yielding to these prejudices. If we oppose in detail every means by which Germany and Russia can recover their material well-being, because we feel a national, racial, or political hatred for their populations or their Governments, we must be prepared to face the consequences of such feelings. Even if there is no moral solidarity [...] there is an economic solidarity which we cannot disregard. Even now, the world markets are one [....] 

The more successful we are in snapping economic relations between Germany and Russia, the more we shall depress the level of our own economic standards. [....] This is to put the issue on its lowest grounds. There are other arguments, which the most obtuse cannot ignore, against a policy of spreading and encouraging further the ruin of great countries.

Substitute Germany and Russia for, say, Afghanistan and Russia, or Venezuela and Russia, or Iran and Russia, and you have as cogent an argument against the current U.S. sanctions regime toward these countries as one could desire. 

Whether we like it or not, the modern global economy is organized on the principle that different commodities are being produced and traded in different places, and that the labor force can move across borders with relative ease. Shutting down these global interconnections and embracing autarky—as the trajectory of more than one contemporary economic force seems to be heading—would be an astounding shock, requiring the creation overnight of wholly new economic structures. 

Maybe such new structures would be desirable. Maybe a world in which the Global South sourced more of its food from local farmers, for instance, instead of having to rely on an unstable supply of imports, would be preferable. But we cannot just turn off the global food system like a switch and expect something better to immediately arise in its place. 

Many people would not survive such an abrupt transition, and so the shift to economic isolationism—the de-globalization happening in our economy right now as a result of the compounding effects of pandemic, lockdowns, war, isolationism, xenophobia, nativism, and misguided populism—bears all the risks of global catastrophe that Keynes was warning about all the way back in 1919.

We can hide the real costs of these moves toward autarky from ourselves for a time. But when we do so, we are building this illusion of prosperity on a bed of sand. 

the boards of its floor are

rotting, and hall upon hall

The moles have built their palace beneath us, we have

not far to fall.