The Keynesian Trap

Welcome to This Week’s Leyendecker View

What matters isn’t being applauded when you arrive—for that is common—but being missed when you leave.
– Baltasar Gracián

THINKING OUT LOUD

The Keynesian Trap

John Maynard Keynes is one of the world’s most famous economists. His economic theories had a major impact on Western economies, particularly during and after the Great Depression.

Keynes is likely most famous for introducing the theory that, during times of economic weakness like a recession, governments should spend more money to pick up economic slack, in order to instigate economic growth. Theoretically, when the government spends more money, it ignites the private sector. This is referred to as “Keynesian stimulus.”

Keynes likely would be fond of something I’ve observed…

Both economic expansions and contractions have a tendency to feed off themselves.

According to Keynes, during a contraction additional government spending can reboot the economy back into expansion, which would then feed off itself. This additional government spending would naturally create a budget deficit, since governments by nature rarely operate in a surplus environment.

But Keynes also thought that, after contraction momentum reversed, governments could end stimulus spending and increase taxes to pay down the deficit that the stimulus spending created.

FDR relied on Keynesian theory during the Great Depression and continued its use into World War II via the growth of our armed forces. At the end of the war, US debt to GDP had ballooned to 119%. It fell from there and bottomed out around 31%t from 1975 to 1981.

But eventually the idea of backing off deficit spending during good economic times bumped into the reality of political democracies. To get elected, politicians either have to promise voters more free stuff or lower taxes. And the really good political pitchmen can promise both. Today, debt to GDP is around 120%.

Now we have all manner of calls to reduce government spending and reduce our deficit. Unfortunately, this will be close to impossible to accomplish. We are now in a Keynesian trap, where government deficit spending is essential to keeping our economy in a “healthy” state of growth.

Why is this? I propose a theory. It’s because we exported our goods production to cheaper labor markets and replaced it with an ever-growing service economy. Here’s a simplistic analysis, calculated from Bureau of Labor Statistics employment data—

In 1981, we had 3.6 service providing jobs for every one goods producing job. In 2021, we had 6.3 service providing jobs for every one goods producing job.

What do you think pays more wages, working in a factory or working at a Starbucks? And what do you think has the highest economic multiplier, producing a product that requires all manner of natural resources and intermediate manufacturing, or making and selling a cup of coffee?

As suggested, this is a very simplistic analysis, so don’t trust it unless you believe in the old KISS adage.

Will the effort to reshore manufacturing solve our problem? Maybe not, if, in the future, robots take wages from high-paying blue collar jobs and if AI takes wages from low-to-high paying white collar jobs. 

Anyone out there with theories on how to get out of the Keynesian trap, please email them to me: doug@leyendecker.com.

THE ECONOMIC VIEW

US economic growth slows
But inflation stays sticky.

Do interest rates matter anymore?
Maybe not for the general economy.

America’s manufacturing renaissance
May not be the job creation machine we hope

US could nearshore lots to Mexico.
But their productivity is not great

INFLATION, DEFLATION, OR BOTH?

Are we heading into a 1970s-style economy?
Jamie Dimon is worried.
Who is ready for stagflation?
Green energy is more expensive
Will voters put up with it?

After big hospitals merge
Their prices rise

Rapidly rising home insurance costs
Are not considered part of housing inflation

THE LABOR VIEW

White collar job growth stalls
Is AI to blame?

Non-competes have been struck down
Now workers consider changing jobs

US VW plant votes to unionize
Union momentum moves south.

The US unemployment rate is 3.8%.
In California, it’s 5.3%
Highest rate in the nation.

MEANWHILE IN EUROPE

Macron says Europe faces “mortal threat”
Need to borrow and invest more, especially on climate.

Europeans don’t work as hard as Americans
Says Norway’s oil boss.

UK has an illegal immigration strategy
Send them to Rwanda.
UK sends long-range missiles to Ukraine
UK housing market turns a corner

German auto companies are struggling.
So workers take defense jobs

THE GLOBAL GAME

Strange bedfellows
Co-sign deal to connect Middle East and Europe

Russians flee Putin’s war to Dubai.
And they’re changing the culture

South Korea has a problem.
In shadow bank real estate loans
Is the SK economic miracle over?

THE UKRAINE FIRE

Long-range missiles help Ukraine.
The US just provided funds for more
Russia threatens to increase attacks

Poland not happy with Russian missiles
That fly through their airspace.

US takes aim at Chinese banks
That have been supporting Russia.

THE GAZA FIRE

Israel wants Hamas out of Gaza
They prepare new Rafah offensive
Can they really get Hamas out?

Hamas tries to sway opinion in its favor.
By releasing propaganda hostage video

Tehran plays down Israel attack
They’d rather their proxies be the focus.
What message did Israel actually send?

THE SLIPPERY SLOPE

Iran to build more nuclear power plants
Will they provide more bomb material?

Niger kicks out US troops
Does Russia have the upper hand?
Russia considers building more African ports

It’ll cost $10T to rebuild West’s defenses
How much for climate change?

FINANCE

Move aside, big banks.
Giant funds rule Wall Street

Traders are leaving stocks and risky bonds
“Priced to perfection” is starting to unravel
Is the knife now falling?

BofA loan charge-offs grow
Canary in the coal mine for loans?

Many US start-ups face extinction
There are more than VCs can fund.

REAL ESTATE

Can we reverse the office real estate doom loop?
Detroit may have shown the way

Big tech wants to downsize office space
Another blow to building owners.

There’s a male youth crisis.
Will it lead to a big drop in home values?

TECHNOLOGY

Big tech blows out earnings
AI will make them many more billions.
Alphabet announces first dividend
X goes after video market
Musk tries to build the “everything app.”

Meta challenges OpenAI
Mark Zuckerberg wants it all.
Earnings beat, but projections scare market

THE CHAT ON AI

AI has a voracious appetite.
For more data centers
And more electricity and water

Look out, Miss America.
A “Miss AI” pageant is coming

Sam Altman invests in energy start-up.
Trying to solve the data center electricity issue

CYBER BEDTIME STORIES

Problems persist.
From healthcare cyberattack weeks ago

Before hackers go for the big countries
They practice on the smaller countries

US Congress approves TikTok ban
Here’s what comes next

OUR GOOD FRIEND, FAILURE

Columbia president cracks down on protests
Go to class, she says
Faculty group has “lost confidence”

A crisis of social fitness
Is stemming from too much aloneness.

More California home insurers leave market
They need higher premiums to return.

THE NEXT NORMAL

US fertility rate at record low
Need to kick in smart immigration.

Teachers can now carry handguns in TN
An interesting policy to watch.

Corporations giving up on DEI
America was built on meritocracy.

The rising terror threat
Lax crime policy + rampant illegal immigration equals…

THE WAR ON CARBON

Global carbon levels hit the roof
Causation or correlation?
Biden wants all coal gone by 2024

All hail US shale!
It’s really helped the US economy
Regional banks support O&G
As O&G hiring explodes
New technologies can unlock more O&G

US natural gas can be our savior
Lower emissions, lower carbon and plentiful.
But bureaucrats prefer hydrogen
LNG exports set record in 2023

THE ENERGY TRANSITION

Wind installations set record
But the industry wants more government pork.
As offshore wind proves uneconomical
Thermal momentum maintains
US reboots solar ingredient factory

Tesla is a mess
Scrambling to sell cars and more
Canary in the coal mine for energy transition?

Don’t give up on thermal
Can it become cost productive?

THE EV DREAM

EV over capacity hits China
Which means it hits the world.

Tesla reports terrible results
Is the EV dream evaporating?
Investors want a cheap EV
Tesla says they’re coming
Can auto companies make money on the cheap?

Maybe by selling your data.
GM doesn’t care about your privacy
Chinese car companies are now tech companies

THE CHINA SYNDROME

Chinese firms investing big bucks abroad
Going after Western IP and customers.

China has a small-town boom
As people leave the urban anthills.

China is nearshoring in Mexico
The products say “made in Mexico.”

Gold price is setting records.
Chinese demand is a big influence

THE WASHING-TONE

Ultra rich should fund Social Security shortfall
An interesting idea?

Biden signs Israel and Ukraine bills
Is House Speaker a bipartisan hero?
No, no, no, says liberal press

FTC bans noncompetes
US Chamber sues to restore them

Is TikTok going away in the US?
Or into the hands of a Washington insider?

THE ELECTION DISTRACTION

Election interest hits new low
Maybe the issues are too complicated.

Biden tries to get Saudi Arabia and Israel closer
Throwing out all the stops to look presidential.
And he proposes giving legal status
To illegals married to a citizen.

MAKING A BETTER YOU

Is eating less
Key to living longer?

Want to remember better?
Then make more mistakes

Want to improve your mental health?
Consider going to church

HOW ABOUT A BREAK

Here’s an English-to-Shakespeare translator
Because we knoweth thee needeth one.

Butt is actually a unit of measurement
But, but, but…

The four biggest ideas in philosophy
Do we even exist?

PLANNING VACATION?

America’s top 20 national parks
Road trip!

The best beaches in the world
You don’t need a cocktail here!

Penn Station to Montreal for $72
LA to Seattle for $117
Chicago to SF for $151
Take a train ride.

SONG OF THE WEEK

Mdou Moctar’s “Funeral for Justice”
A Muslim Jimi Hendrix meets Bob Marley?

A bonus golden oldie…

Guns & Roses live at a bar, pre-fame, 1985.
“Don’t Cry”
The patrons hardly notice.
Here’s the official music video
Lyrics can be poetry, ya know.

CASTING AROUND THE PODS

Doing less, doing better
The first 90 days of fixing a company.

VIDEOS OF THE WEEK

The Ministry of Ungentlemanly Warfare
Gotta love Guy Ritchie and Henry Cavill.

Challengers
Zendaya struts her stuff.

Eating the world’s largest lobster roll
Oh me, oh my!

FROM THE HEADHUNTER’S KITCHEN

Hello, Spring!
Time for pasta primavera
And then…
Iced berries with limoncello white chocolate

What’s your dinner party style?
Choose one, then get a plan

The best $500 steaks in Chicago
I’d rather have Chicago pizza

THE RANDOMS

What do you think: Does “isn’t this wonderful” or “doom and gloom” news attract more eyeballs? Guess which kind has the biggest influence on you.

Given the disruptive and violent protests spreading across elite universities, will holding an elite degree soon prove to be  a disadvantage? It might already be happening.

McKinsey, once the holy grail for elite graduates, is trying to get rid of some of their elites.

Used car prices appear to have peaked a few months ago and are beginning to fall. This helps reduce inflation. But used car prices are still much higher than they were before Covid. Do you think the Biden administration’s push to get everyone into an EV has anything to do with higher used car prices? 

One area where AI could significantly improve our world is in health care. Gene editing has the potential to prevent and/or cure many common diseases. The first AI-enabled treatments could be market ready within the year.

About 100 years ago, only 1% of US households had hot water. We should count ourselves as extraordinarily lucky.

Japan has a debt to GDP of over 250%. Argentina’s debt to GDP is closer to 70%. Why has Japan been able to remain globally competitive, while Argentina’s economy has virtually no global significance? 

“In God We Trust” is the official motto of the United States of America. You have surely seen it on our currency. Do you know its origin?

Gold is the new gold.

Five ways the French helped us win the American Revolution, just in case you were curious.

IN CASE YOU MISSED IT

The End of the West?
April 19, 2024

The End of an Era
April 12, 2024