More Macroeconomics and Less Heterodox Experiments

Macroeconomics, born from the 1929 crisis, has developed an arsenal of measures to ease the effects of cyclical crises and find a way to restore the growth of the gross domestic product and employment. As an example, we can cite changes in the main world economy, the United States, which, after nearly eight years, is emerging from the very serious “subprime mortgage crisis” that started in 2007. The effects of this debacle were severe, even though not as much so as in previous cases, thanks to the extremely good management of macroeconomic variables that was devised on this occasion.

Cycles are recurring crises of the economic system, and when they occur, they are not the end of the system but rather a correction, one that tends to be very painful due to the unemployment that comes with it.

In an industrial economy as it was during that time period, governments, observing the crises since the end of 1929, put different practical measures in place to prevent decreases in productivity and employment, including carrying out public works on the largest scale possible. In our country Argentina, for example, the National Road Network was created in 1932 to pave or asphalt our country’s main routes of transportation, which enabled many workers to be employed.

Years after having applied a large amount of practical experience in almost every country to lessen the force of the crisis, academics collected and simplified those experiences in papers and books. The most notable and influential was that of J. M. Keynes, who, seven years after the crisis started in ’29, published “The General Theory of Employment, Interest and Money” in 1936. In the book, he studied the behavior of key variables in countries and demonstrated that an economic model could be in long-term equilibrium, but with a permanently high unemployment rate. To compensate for this imperfection of the model, it was beneficial to increase public spending in investments even when this incurred a fiscal deficit. “It’s better to dig a hole and fill it up again than have millions of unemployed people,”* said Keynes, supposedly, in order to ease those conditions. Macroeconomics is considered to have been born with the publications of that period; it is the economy of a country as a whole, which is differentiated from microeconomics or the economy of a company, the labor market and each individual.

Has the development of macroeconomics produced any significant results? My answer is yes, of course; even though it was not able to eliminate the cycles, it has been able to moderate them, and this is an important result.

In the crisis of ’29, the U.S. unemployment rate reached 25 percent of the economically active population, a huge figure. Even though the authorities managed to gain control of unemployment after many years, the suffering of many people could have been eased much more or could have been avoided if measures that we have now perfected were applied. Changes in unemployment from that period to now show fluctuations and some high peaks, but less than that of the Great Depression.

The crisis that began in 2007 shows financial variables with aspects similar to or worse than those of 1929-1930, but the treatment could not be the same as in that situation, since our economy is greater than 65 percent services and just 15 percent industry, which is very different from the GDP structure in 1930. That is why Keynes is not as applicable in a service economy. Due to this, different but equally dramatic macroeconomic measures were taken, measures that succeeded in arresting the sharp growth of the crisis, which is why unemployment only reached a peak of 10 percent of the active population, much less than the crisis of 1930.

In November 2014 in the U.S.A., unemployment rose once again to 5.8 percent and currently is already at 5.6 percent. This figure is considered practically normal, meaning unemployment that comes from people switching jobs — resignation or dismissal, starting in new positions, analysis of one’s health, incorporation and others — which is approximately 5 percent.

What were not fulfilled were the apocalyptic predictions from detractors of the currently established system of production, who said it was “capitalism’s final crisis”* and that, from that point on, a new system of organization and production would emerge. This not only did not happen, but capitalism was consolidated, even in countries that have very different political systems, like China, for example.

We should learn this lesson: We have preferred the government granting welfare payments to the poor to meet their basic needs, but this does not get them out of those conditions, and the worst part is that it condemns them to vote for the government to keep receiving those payments.

Instead of having used an enormous amount of resources from high commodity prices, merely giving out welfare payments, we had to create a network of highways and trains, a plan for infrastructural projects and another for prospecting for and extracting oil and gas. That’s how we could have productively and formally employed all those people. In addition to having sustained the population’s higher level of consumption, we would not have 25.7 percent of the country in a state of poverty, people who still live a life of subsistence. Furthermore, we would also have a national energy supply to cover our needs and all those infrastructural projects that we did not complete because we merely subsidized consumption.

Let’s not repeat naïve populism’s mistakes: More macroeconomics and less heterodox experiments is what we need.

*Editor’s note: Accurately translated, this quotation could not be verified.