The Political Economy of John Maynard Keynes - Then and Now

John Maynard Keynes was the brilliant British economist who upended the laissez faire economic policy that prevailed in the early1930's -- the notion that the economy self-corrects and the best government can do is to get out of the way even during economic crises like the Great Depression. He developed the theoretical foundation for counter-cyclical economic policy --  the need for government spending and other measures to stimulate the demand for goods and services during downturns in order to restore business activity closer to full employment levels.  

But as Zachary Carter writes in his recent biography of Keynes and sweeping history of economic thought from pre-WWI to the financial crisis of 2008 (The Price of Peace: Money, Democracy and the Life of John Maynard Keynes), Keynes was much more than the 'fiscal therapist' he is set out to be in the sanitized version of Keynesianism taught in economic departments throughout North America and Europe. He was a  great philosopher of war and peace who challenged the very basis of limited government, free-market economies.

For Keynes, the crisis facing European and North American countries leading up to and during the Great Depression was not simply cyclical downturns and collapse of economic activity. That no doubt was a central concern, especially after the crash of 1929. But the larger issue for Keynes was the suffering in the general populations throughout Europe -- suffering exacerbated by wars, ill-conceived terms of the peace, the Depression of course -- but most fundamentally brought about because of a failure of free-market economies to foster the government support and investments needed to meet essential community and societal needs.  It wasn't just the economic instability and insecurity that concerned Keynes; it was the  political instability it gave rise to -- political instability manifested clearly in the rise of Bolshevik and Fascist extremism, leading directly to the unthinkable Second World War.

The irony of Keynes is that he developed what was then considered and some still think is a radical prescription -- aggressive government intervention to address the failure of free-market economies to provide the counter-cyclical and social investments a healthy society needs -- for quite conservative goals. He wanted to save liberal, western society from the oppression wrought by left and right wing populist extremism and the global chaos that inevitably follows.

Keynes' academic and political battles were fought in the period from World War I through to the end of World War II. The 'Keynesian' issues have mostly been resolved -- most economists and governments accept the need for government intervention to restore economic activity during recessions, albeit with conservatives and monetarists favouring tax cuts and low interest rates to stimulate demand and with liberals and progressives favouring government spending.  But the bigger issues raised by the political economy of Keynes are as relevant and contentious today as they were in Keyne's own time. 

The question remains -- can free-market economies, even with reasonable counter-cyclical fiscal and monetary policies, provide the support and investments needed to meet essential community and societal needs. And if that support and investment isn't there, can we expect a resurgence of left and right wing extremism with all the pain that can bring, as occurred in Europe between the two world wars.

John Kenneth Galbraith directly addressed this issue in his book, The Affluent Society. In his acerbic attack on the tax-cutting, limited government policies of  conservatives, Galbraith wrote: "what is the advantage in having a few more dollars to spend if the air is too dirty to breathe, the water too polluted to drink, the commuters are losing out in the struggle to get in and out of the cities, the streets are filthy, and the schools so bad that the young perhaps wisely stay away".  

The specific concerns Galbraith raised may not all be as relevant today, but the general issue certainly is. Do we or do we not need public sector investments to address the scandalous conditions of homelessness, poverty and substance abuse afflicting so many in our urban centres; to support workers and communities who bear the largest costs of the necessary transition away from fossil fuel industries; to make investments in high quality child care and education services for children of all backgrounds and family means; to support culture, art, public libraries and all of the social infrastructure that enrich our lives. The list could go on. 

One of the interesting themes in Carter's biography of Keynes is the notion that in modern times the central problem is not scarcity -- it is not the classic economic question of how we can utilize labour, capital and natural resources most efficiently to maximize what we produce. The question that Keynes raised and is still so important today is not 'how' but rather 'what' should we produce and 'for whom'. 

The Price of Peace: Money, Democracy and the Life of John Maynard Keynes is a long read, but well worth the trouble. It is great history both of Keynes and the leading economists who followed, and provides critically important background to understand the debates we are or at least should be having in the present, and the future we may be heading for if we repeat the mistakes of the past. 

Systemic Bias in Media Coverage of Covid

While there have been some very informative and balanced articles on Covid -- the exceptional pieces by Ed Yong, Zeynep Tufekci and James Hamblin in The Atlantic stand out in this regard -- for the most part coverage of the pandemic by the mainstream media has suffered from the same systemic biases that distort so much of MSM reporting. The business imperative of capturing readers' attention is better served by tweets and articles that inflame rather than inform the general public. 

In the case of Covid this systemic bias is particularly evident in the relentlessly negative daily coverage and commentary on cases and hospitalizations, public health measures, vaccine procurement and delivery, and life during and after Covid. It is a negativity that is not just inaccurate and unbalanced in many important respects, but is compounding the tragedy of the Covid pandemic with a mental health crisis of depression and despair, the costs of which may continue well after Covid is effectively gone.

There is, of course, valid reason for negativity in all things Covid. It has been a devastating disease taking and disrupting lives in so many ways. But context and balance is critical in understanding where we are and where we are going, something often lost in MSM reporting. 

Take, for example, the coverage of the third wave of Covid cases here in British Columbia. As the number of cases grew at alarming rates in the late winter and early spring, the media seized on the potential for unmitigated exponential growth especially with the variants taking hold in the province. On April 1, when new cases in B.C. had risen to almost 1000 per day, Global News featured modelling results suggesting that new cases could double every 10-12 days -- implying new cases could rise to well over 2000 per day by mid-month. Daily case rates didn't in fact double in the first half of April. By mid month, they were still in the vicinity of 1000 per day. Nevertheless, on April 16, Global News again reported the potential for  new cases doubling every two weeks, rising to over 2000 to 3000 per day by May -- which we now know hasn't happened and almost certainly won't.

The potential for exponential growth is clearly important to report. But so too is the fact that the exponential growth didn't take place. The circuit breaker measures implemented by public health, the public response and on-going vaccinations have clearly slowed and seemingly reversed the growth in cases. But the positive mitigation in the growth of cases didn't make the news. The media coverage stayed with the potential for exponential growth and failed to highlight and explore why that didn't occur.

The fundamentally different consequences of the third wave also escaped MSM attention. There has been an alarming increase in cases and hospitalizations in this third wave, exponential or not, putting pressure on hospital facilities and staff in major urban centres. But unlike the first two waves, there hasn't been anywhere near the same number of deaths. As shown in these graphs of Canada-wide cases and deaths, the pattern is dramatically different.

The number of cases in Canada now is as high or higher than it has been from the outset of the pandemic. The number of deaths, on the other hand, is less than one third what it was in the earlier waves . The consequences of the pandemic are still serious, but they are fundamentally different. With the vaccinations of the elderly and most vulnerable populations, the costs of Covid are arguably far less now than they were in the earlier waves. Pressure on hospitals can be addressed. Illness can be overcome. It was the high death rate in the early waves that was so catastrophic.

I'm not suggesting that the media shouldn't be reporting on the serious third wave of Covid infections. But at least in places like British Columbia that should be balanced by recognition of the success the targeted public health measures and vaccinations have had and hopefully will continue to have. And it should also recognize the near miracle of the vaccines that have been developed in such a short period of time and the  amount we have already been able to access despite the globally limited supply.

These are difficult times. But we are so fortunate in British Columbia for the careful and thoughtful way the crisis has been managed -- not perfectly for sure, but exceptionally well by comparison to our neighbours to the south, most countries in Europe, and virtually all of Latin America. Critics in the media and elsewhere can be negative for their business, political or other reasons, but to fight the depression and despair that negativity brings on we need to appreciate that things are not as bad as some would suggest and certainly not as bad as they could have been. Despite what we constantly hear and read, the outlook is unexpectedly good.

The Increasingly Misplaced Fixation on the Number of Covid Cases

Good public policy requires a clear understanding of the objective.  There is no point claiming you have 'the answer' when there is little agreement or clarity of the question.  This is true for all public policy issues, but particularly so when what is called for -- the answers -- are extreme in their nature and consequences.  

I've been thinking about this as I hear some people call for more extreme lockdown measures to counter the risk of escalating cases of Covid due to the prevalence of more infectious variants.  A recent op-ed in the Globe and Mail, for example, called for a total lockdown and Covid suppression strategy much like New Zealand did early in the pandemic. 

Aside from the fact that Canada is not an island, and with agricultural and other essential products trucked across the border every day we could not totally suppress Covid outbreaks without comparable measures in the US, total suppression presumes the objective is to eliminate all cases of Covid.  That undoubtedly would be nice, but it is not something Canada on its own could ever achieve.  Nor should it be the primary goal of Covid-related public policy.

The realistic goal for Canada and other nations has always been to minimize the incidence of severe illness, hospitalizations and deaths from the spread of Covid.  And that is something we can and will achieve without extreme Covid suppression strategies.  The continuation of distancing and masking, contact tracing and containment, and priority vaccinations of the most vulnerable populations won't eliminate Covid.  And it won't stop mutations and spread of more infectious variants.  But it will over the next months reduce illness and death.  It will do what needs to be done.

It has become part of our 'days of Covid' routine to monitor the number of cases that are reported with great fanfare every day.  But cases are not what we most need to watch.  It is hospitalizations and deaths that should be of primary concern.

It is true that before vaccines were available cases were a leading indicator of the hospitalizations and deaths that would follow.  But with the priority vaccinations that we have already achieved despite shortages of vaccine supply, and will see at ever-increasing rates in the weeks and months ahead, that should change.

It is human nature to fixate on numbers and worst fears.  But we do a disservice to ourselves and our country if we fail to recognize how fortunate we are with the unprecedented development of Covid vaccines--vaccines that may not eliminate all cases but are widely held to greatly reduce the incidence of severe illness and death.

We don't need excessively restrictive measures aimed at eliminating Covid cases when it isn't necessary to do that to achieve our primary goal.  We should never forget that the costs to people's material and mental well-being of excessively restrictive measures are great, far in excess of the benefits they would provide as priority vaccination of vulnerable populations breaks the hard link between cases, hospitalizations and deaths.

Site C (Again)

Opponents of the Site C project are quite right that sunk costs, no matter how large, should not determine whether it is appropriate to complete the project. The decision to proceed at any point in time should be based on the costs and benefits of going forward. That was true when the current government decided to continue construction in 2017 and remains true today.

However, any such go-forward analysis requires a clear understanding of the challenges and opportunities that electric utilities face with growing penetration of wind, solar and other intermittent supply, and the strategic value a resource like Site C can provide. That is completely missing in the latest calls to halt the project. 

Based on a comparison of spot market electricity prices in the US Pacific Northwest with their estimate of the cost of completing Site C, project opponents calculated  that BC Hydro could  save some $100 million per year by halting construction at this time.  It is not clear that this calculation fully considered the contract termination, dismantling and rehabilitation costs that halting a project this far advanced would entail.  Nor did it appear to recognize any benefit to a capital-intensive project like Site C from the low interest rates BC Hydro has locked into.  Nor is there any reason to have confidence in their estimate of the cost of completing Site C, or of the cost of their alternative, US spot market supply, over the long life of a project like Site C.

But more important than all that, the project opponents' analysis completely ignores the strategic value that the dependable capacity and shaping capability of a hydro resource like Site C provides. 

Growing amounts of wind, solar and other intermittent developments are increasing the variability of electricity supply and corresponding volatility of electricity market prices. When the wind is blowing and the sun shining, there is ample supply of electricity and market prices fall -- sometimes to zero or even negative levels when supply far outstrips demand. However, when supply from those intermittent sources is limited by weather or sunlight conditions, electric systems are constrained in their ability to meet demand and market prices can spike to very high levels. 

The US Pacific Northwest or other spot markets can be very cost-effective sources of supply. Indeed, the restrictions that government has imposed on BC Hydro in their use of spot market supply to meet provincial demand should be eliminated. (Ironically it is one of the most vocal opponents of Site C -- the Green party -- that prevented the NDP government from relaxing those restrictions this past summer). However, the best use of the spot market is an opportunistic one.  It isn't a source of supply you want to be forced to rely on regardless of the market price, for example in peak demand periods when you are short of supply because of a lack of your own dependable generating capacity..  Rather you want to buy from the spot market when supply is plentiful and prices are low. 

The opportunistic use of the spot market is precisely what BC Hydro's hydroelectric system enables it to do -- generate power in BC when spot market prices are high, and buy power,  backing off its own generation, when spot market prices are low. The development of Site C will enable BC Hydro to do that even more. 

What the latest opponent analysis of Site C completely misses is that the spot market is not a substitute for Site C. Nor is the expansion of wind and solar projects in the province that others would have BC Hydro acquire in lieu of Site C. Those sources do not provide the dependable capacity and shaping capability to produce your own power when it is most valuable, and to buy from the spot market when it is most advantageous to do so. 

What needs to be recognized is that rather than substitutes for one another, Site C complements greater cost-effective use of the spot market and can serve to accommodate more wind and solar development in BC and neighbouring jurisdictions. It is a strategically important and valuable resource.

It is possible, though highly unlikely, that the geotechnical problems and cost escalation for Site C would justify terminating the project at this time. But the challenge then would not be simply to replace the energy that Site C would have produced. It would be to develop the alternative demand and supply side measures that could offer the dependability and flexibility that more hydro production in the province would provide. The project opponents have yet to recognize the issue, let alone provide practical, cost-effective solutions.

On Tax Cuts and Cash Giveaways

They were never meant to be well considered policies.  The Liberals' promise to reduce the provincial sales tax and the NDP cash giveaway of $1000 per household were both the standard stuff of populist-driven electoral politics.  Still, it would be nice if during the leaders' debate or other forums, there was some serious discussion about government taxation and spending in this province - where the parties want to go over the medium to long term.

While one can justify virtually any fiscal stimulus including tax cuts and cash giveaways in the wake of Covid, in the not-too-distant future government will have very hard choices to make.  The government won't be able to sustain the on-going deficits it is currently incurring and yet there will be demands for more government resources in a whole host of critically important areas.

The homelessness and despair in our parks and streets is both a tragedy and disgrace.  There are no simple answers but one thing is clear.  It will require a Covid-level commitment to address the underlying problems and the resources to match. 

Reducing greenhouse gas emissions is a universally shared objective, but it too will require serious commitment and resources to get beyond high-minded targets and achieve major reductions.  Infrastructure and other investments will be needed to make affordable, green energy alternatives available for households and industry.  Comprehensive programs and plans will be needed to support fossil fuel-dependent workers and communities in their transition to new employment and economic activity in the face of their industry's decline.  

The benefits of high quality early education and child care, both for long term child development and the more immediate needs of parents, are now widely recognized and accepted across the political spectrum.  But for that to be provided throughout the province on more than a piecemeal basis will require major investment in facilities and staff training, and on-going commitment to operating costs. 

And then there is the aging population and growing need for health care facilities and services.  There is backlog in transportation infrastructure; the on-going need to seismically upgrade, refurbish and expand school facilities; and other major demands as well.  The list could go on.

Of course, government must make choices -- not everything can be done to the extent we would like.  But if we are to take these challenges seriously, government must commit to doing more than they have in the past.  The question is whether and how the Liberas or NDP are willing to do so. 

The short term fixes the parties are offering are of no help in dealing with these critical needs.  Cutting taxes as the Liberals are offering, which will be difficult to reverse in future years no matter what their current intentions, will only make the problems worse.  Government will need more resources and unless the Liberals have some other tax in mind, their tax cut proposal will make it more difficult to address the fundamental fiscal challenges government will face. 

The NDP cash giveaway is not much better.  It will add to the deficit in the short term and increase the fiscal challenge government will face to allocate more resources to the pressing medium and long-term needs.

It is no doubt naive to think any party will want to talk about how much resources they will devote to the problems we know have to be addressed, and more to the point, how they think they will raise the required revenues.  But it still would be nice to hear whether the leaders appreciate the challenge, and in suitably election-tainted general terms, tell us how they plan to deal with it.

BC Ferries Needs More Than a Covid Bailout

It is the classic problem BC Ferries has always faced – first as a Crown Corporation and now as an unnecessarily complicated quasi-private company still dependent on government subsidy. Given the constraints on fares imposed both by the government and a regulator, the government subsidy is not sufficient to fully cover the losses on the service government requires BC Ferries to provide. The combination of fares, subsidy and service levels are not financially sustainable over the long term. 

The recently announced Covid-related bail-out will help address BC Ferries’ immediate financial woes due to the springtime and early summer collapse in traffic and revenues. But it won’t deal with the long-term unsustainable arrangements, particularly with the provincial government making clear it wants more service without any fare increases or any reversals of the seniors’ and other fare discounts forced on BC Ferries over the last few years.

 

You can be sure the current government, like every government before it, will not want to increase the contract subsidy to the levels needed to sustain the service levels and fares it wants to see. And ferry customers, particularly the vocal Island stakeholders who think BC Ferries should be seen as part of the highway system, will not support increases in fares or cuts in uneconomic service consistent with the level of subsidy government will provide.

 

However, if BC Ferries is going to be able to recruit and maintain the skilled labour force it needs, expand and modernize its terminal capacity, maintain and upgrade its fleet, something will have to change. And if more subsidy and/or higher fares are not on the table BC Ferries will need to be given the flexibility and encouragement to fundamentally change the way it does its business.

 

It will need to introduce changes to its rate structures, reservation policies and schedules in order to increase the utilization of ship capacity much like the airlines were forced to do. Higher capacity utilization in off-peak periods and seasons will reduce average costs and the need for higher fares or subsidy to sustain operations.

 

For the longer term, definitely post-Covid, BC Ferries will have to make much greater efforts to encourage passenger as opposed to vehicular travel, especially in peak periods and seasons when more ships are needed to accommodate more vehicular demand. Encouraging more passenger as opposed to vehicular traffic requires better integration of ferry service with convenient land transport options including island taxi, uber, car share, bike and e-bike share, and upgrades of safe island bike networks. It requires as well much lower passenger fares with the bulk of BC Ferries revenue requirements recovered from higher fares on vehicles.

 

BC Ferries must also look for and be able to act on opportunities to eliminate duplication of terminals and reconfigure costly routes. And it should work jointly with the government to identify opportunities to replace ferry service to some islands with lower cost bridge connections.

 

There are calls for BC Ferries to return to its former crown corporation status. There is some merit in that. The current quasi-private structure makes little sense and probably adds to the interest costs BC Ferries pays on its large and growing debt. But that in itself won’t solve the fundamental problem. Fundamental change is required for that.

 

What's with the Greens?

It is disheartening to see the Greens try to derail the NDP’s efforts to eliminate some of the worst aspects of the previous government’s Clean Energy plan – in particular the NDP’s proposal to eliminate the self-sufficiency requirement that the Clean Energy Plan imposed on BC Hydro.

The self-sufficiency requirement called on BC Hydro to develop or contract for firm electricity supply from BC sources sufficient to meet forecast BC demand. It sounds harmless enough but it is hard to overstate how misguided and costly that policy has been.

Self-sufficiency was never needed to ensure reliable supply. If security of supply was the concern, the requirement should have been directed to ensuring BC Hydro had sufficient dependable peak generating capacity to meet sustained peak loads. But it was silent on that critical issue, focussed instead on the supply of energy regardless of when it was produced. That suited BC’s private run-of-river power producers, who could provide energy (unfortunately for BC Hydro customers disproportionately in the springtime when least needed), but little dependable peak generating capacity mid-winter when most needed.

There was the telltale sign that this requirement had nothing to do with reliability when it precluded BC Hydro from relying, if ever needed, on the province’s entitlement to the downstream power benefits under the Columbia River Treaty, a source of supply guaranteed under international treaty agreement and easily as reliable as contracted supply from BC sources of supply.

Nor was the self-sufficiency requirement cost-effective for BC Hydro customers. It had the predictable (indeed intended) effect of forcing BC Hydro to buy high cost, low value electricity it did not need.  The financially losses BC Hydro incurred as a result have been staggering. The average cost of the power BC Hydro was forced to buy averaged over $125/ megawatt hour, more now with the inflation provisions in the contracts. That power is worth less than $25/ megawatt hour – the losses, that have to made up for in higher than necessary BC Hydro rates, are in the hundreds of millions of dollars per year.

It was, pure and simple, a scheme by government and their developer friends to create an artificial market for what the developers could provide – all at the expense of consumers. We used to call that Mercantalist protectionism. I suppose today it could be better described as Trumpian economics, with its veil of national, in this case provincial, security of supply.

Perhaps the Greens believe circumstances are different now. They are, but if anything current developments provide an even stronger argument to eliminate the misguided self-sufficiency requirement imposed on BC Hydro. The explosion of solar and wind development in Alberta and the western United States is at times producing large amounts of surplus that can be purchased at very low prices. During high wind events and periods of high solar production prices can fall to zero – even go negative. With its large reservoir capacity BC Hydro is uniquely capable of taking advantage of this low-cost supply whenever available. Self-sufficiency only impedes BC Hydro’s ability to do so.

One would think that the Greens, of all parties, would understand the need to acquire electricity at the lowest possible cost in order to maintain low electricity rates and encourage the electrification in transport and industry we need to meet our GHG reduction targets. For that we should be doing the exact opposite of self-sufficiency. We should be expanding our interconnection capacity and freeing up BC Hydro’s ability to acquire clean energy at the lowest possible cost from wherever it is available.

That’s doesn’t mean there won’t be private or community power developments in BC. There will – when and where they are economic. It is true BC Hydro could do much more in making available low cost transmission and back-up services in order that developers could undertake power projects on their own. But the government should end the craziness of forcing BC Hydro to buy power that it does not need for reliability, that is not economic, and that limits its ability to take advantage of the exceptionally low cost renewable energy increasingly available in neighbouring jurisdictions.