Let me say first that I like history. I think historians have a lot of interesting things to say and I don’t think historians should be economists. But . . .
I It depends on the definition of “great.”
Go to the following link and scroll down to the Ranking of presidents by historians in a 1996 poll. Wilson is ranked 6th whereas his successor Harding is ranked 41st. That’s 41st out of 41 presidents when the poll was conducted. Where does one even start?
1. I had known for quite some time that Wilson’s economic policies were perhaps the worst in American history. He presided over the creation of the Fed and the income tax, which went from 0% to something like 70% while he was president. In the long run the Fed may have been a good thing, but there can be no doubt that 1913 was premature, we didn’t know anywhere near enough about monetary policy to warrant a central bank meddling in the gold standard. He presided over a period of very high inflation after WWI, when we actually needed somewhat lower prices. Then we had a severe depression in his last year of office. Industrial production had fallen by 32.5% by March 1921 when Harding took office (and you think things are bad now!)
But guess what; by November 1922 we had recovered, as industrial production had already passed the previous cyclical peak. (If you factor in a 3% trend rate of growth, a new peak was reached around March 1923.) How did he do it? Recall that Hoover and FDR relied on policies of propping up wages and raising tax rates—that’s why FDR’s recovery took nearly nine years, and even 8 and 1/2 years from a July 1933 industrial production figure that was roughly as depressed as March 1921.) Instead, Harding let wages fall and cut income tax rates sharply. BTW, do you think industrial production will fully recover by January 2011, after Obama has been in office for 2 years?
2. Wilson had arguably the most destructive foreign policy in American history. When there is a delicate balance of power in Europe you don’t want to meddle unless you plan to stay there permanently. Yes, I know Wilson did intend the US to hang around, but he should have known we were an isolationist country before he brought us into WWI. All he did was assure that the strongest country in Europe lost. When we pulled out (as was inevitable), a rematch was almost preordained. WWII was the fruit of Wilson’s foreign policy. (As were more than 116,000 dead American soldiers.)
3. Wilson was one of the most repressive presidents in American history, imprisoning thousands of people whose only crime was to disagree with his political views. It was left to Harding to release people like Socialist leader Eugene Debs from prison, as well as many others.
4. And I also recently learned that Wilson was a vicious racist. Yes, I know racism was widespread at the time. But he was much worse than the Republicans who came before and after him. Check out this article from Reason magazine.
So other than being a horrible president in terms of economic policy, foreign policy, civil liberties and civil rights, he was a great president. And Harding was the worst ever. What was Harding’s great crime? A few of his aides took bribes. But isn’t that common? Didn’t Eisenhower and Johnson and Nixon and Carter and Reagan and Bush and Clinton have cabinet secretaries that got involved in scandals? I welcome any historians to write in and tell me exactly why Wilson is a great president and Harding is the worst ever. Is it just a question of Wilson being more active? Are historians using the old fashioned definition of “great,” which meant something like “powerful?”
II. Was Keynes really a savvy investor?
I got to thinking about this issue last night well reading The Lords of Finance (which by the way is a fine book so far, despite one little point I will nit pick.) See what you make of this:
“In early 1920, he [Keynes] set up a syndicate, with his brother, some of the Bloomsbury circle, and a financier friend from the City of London. By the end of April 1920, they had made a further $80,000. Then suddenly, in the space of 4 weeks, a spasm of optimism about Germany briefly drove the declining currencies back up, wiping out their entire capital. Keynes found himself on the verge of bankruptcy and had to be bailed out by his tolerant father. Nevertheless, propped up by his indulgent family and by a loan from the coolly acute financier Sir Ernest Cassel, he persevered in his speculation”
Translation, without help from his rich daddy and rich friends, this cocky, arrogant, smart-aleck would have fallen on his face, ended up digging ditches somewhere and we would never have heard of him. But he did have a rich daddy, who bailed him out.
[Alert to amateur psychologists: Yes, I was not in my high school's Bloomsbury group, and I worked my way through college and grad school w/o financial aid.]
Don’t anyone write in and tell me that Keynes made lots of other good investments, because if you’ve got a rich backstop, none of that matters. Here’s what I’d do if Bill Gates was willing to lend me $3.57 billion dollars for a day:
I’d go to Vegas and put $5 million on numbers 1 through 34 on the roulette wheel. The odds are roughly 90% I’d win. If I did so, I’d win $180 million on a bet of $170 million. I repay the $3.57 billion and pocket my $10 million dollars and be rich for the rest of my life, clipping coupons. If numbers 35, 36, 0, or 00 came up I’d bet again, this time $100 million on each number 1 through 34. If I won, I’d receive $3.6 billion, repay Gates, and have $30 million dollars to spend for the rest of my life. The odds are nearly 99% that I’d win one of these two bets. Of course if both failed, I’d be in big trouble. But that’s not very likely is it?
What’s the point? If you have a rich backstop it’s relatively easy to come up with investment strategies that will usually (not always) make you look like a genius.) From now on I will never believe anyone who tells me that Keynes was a great investor. Does this matter? It shouldn’t, but unfortunately it does. If his investment reputation was like Fisher’s (calling stocks fairly priced in 1929) nobody would take seriously his Chapter 12 in the General Theory where he tries to shoot down the efficient market hypothesis. That is the chapter that has a lot of nonsense about musical chairs, beauty contests, and the seasonality of ice prices. But I’d like to focus on his assertion that investors only care about the short run, because I hear this argument a lot from commenters.
Suppose investors only cared about the short run, as they only intended to hold shares for 5 years. What would be the value of a biotech company that did not expect a breakthrough to occur for 15 years? To estimate it’s value, let’s suppose that the breakthrough is expected to be worth $10 billion, if the patent were sold to a big pharma company. So would the stock be worth anything today? Yes, because investors today would know that 10 years from now (if investors still had a 5 year horizon) the stock would be worth the present value of $10 billion earned 5 years later. Through backward induction we can see that the current value of the stock would be exactly the same as if investors had a long term focus. In case you don’t believe me, contrast the difference in value between a 20 and 30 year bond with equal coupon payments. All the differences occur in the out years, and yet those differences get correctly priced into the current market values of the bonds. If anything, history suggests that investors have too much of a long term focus, as they have been remarkably patient with biotech stocks lacking any earnings at all. So Keynes’ views on investment are superficially witty and sophisticated, but on closer examination are intellectually empty.
Keynes was no where near the economist Fisher was. In Chapter 12 of the GT (p. 142) he completely fails to understand how the Fisher effect can raise nominal interest rates. The AS/AD model we teach with its self-correcting economy and monetary policy being the preferred stabilization tool is pure Fisher. It is right out of his 1923 and 1925 papers where he developed a “Phillips Curve model” of the business cycle more than 30 years before Phillips. Keynes didn’t believe in a self-correcting mechanism or in the efficacy of monetary policy in a depression. His GT purports to explain changes in NGDP, but has no explanation for how NGDP is determined.
I worry that too many economists on the left have bought into his scorn for rational expectations. I vaguely recall Krugman making an offhand comment in his Lionel Robbins talks about failing to understand why anyone would pay attention to the stock market. Certainly there is a widespread disdain among economists for the message from stock investors, who Paul Einzig affectionately termed the “submen.” Why should we care what investors think? Here’s one reason:
1. If the Fed had paid attention to the 1929 stock market crash maybe they wouldn’t have let the US monetary base fall sharply between October 1929 and October 1930.
2. And maybe if the Fed had pursued an expansionary monetary policy the Depression would have been less severe in 1930.
3. And maybe if the Depression was less severe in 1930 we would never have had such serious bank panics.
4. And if we had not had serious bank panics then maybe there would never have been a Great Depression.
5. And if there had been no Great Depression it seems far less likely that the Nazi’s would have been elected in Germany. (They were a tiny party in 1929.)
Is that reason enough? Or should I also mention what happened when the Fed didn’t pay any attention to the stock crash of October 1937? Or how about last October’s crash? You may recall that at that time the Fed (and for that matter Paul Krugman) did not expect the unemployment rate to get anywhere near 9.4% this year. To be honest, neither did I. But I knew the markets were saying that Fed policy was far too contractionary. And just as in 1929, the markets were right and the Fed was wrong.
That’s why these seemingly unimportant debates over whether Keynes was a good investor actually matter.