Reading Keynes Correctly for Economic Success

By Milton Ezrati

Obama’s economy faltered because he destroyed what the great economist John Maynard Keynes called “animal spirits” and that he identified as essential to sustain any expansion. Trump, though hardly a reader of Keynes, has nonetheless offered plans to rejuvenate those critical “spirits”. It remains an open question whether Washington can implement it.


Had Barack Obama read his Keynes thoroughly, the American economy would look stronger today. He did embrace some of what Keynes said.  His turn to public works spending to counter recession in 2009 was, for instance, typically Keynesian, as was his general preference for government management in things economic. But his economy underperformed anyway, not because Keynes erred, but because Obama seems to have missed the great economist’s emphasis on “animal spirits”. Keynes used this quaint and somewhat condescending phrase to describe the drive among businesses to hire and invest aggressively whenever they anticipate profits.1 This impulse, he made clear, is essential to multiply and extend the effects of government stimulus. Obama, by ignoring it, indeed actively quashing it, undermined his own economic programme and has made Trump’s job much more difficult.

Trump, who doubtless has neither read Keynes nor intends to do so, has nonetheless talked up these crucial spirits. Signs of the change emerged almost immediately after the election. To get lasting results, however, and secure this economy’s health, this new administration will need to do more than talk. It will have to push for a raft of policy changes, to lift regulatory burdens; to refurbish the nation’s infrastructure; to reform the tax code, most especially the corporate code; and to devise well-conceived replacements for the Affordable Care Act (ACA) and the Dodd-Frank financial reform legislation.

Most destructive perhaps was the Obama administration’s aggressive regulatory agenda. However justified in other terms, the active rule writing and enforcement imposed increased costs on business and, worse, gave it the sense that government would behave in seemingly arbitrary ways.

Though these circumstances offer opportunity, for the moment the economy still labours under the Obama administration’s sad legacy. Almost everything Obama did worked against growth, so much so that his policies could offer a tutorial of what not to do. He began by trumpeting his hostility to business in general and profit making in particular. If this was hardly a way to prompt business to take the risks necessary to expand, he drove that point home in the nature of his 2009 public works programme. Its $819 billion in spending went less to roads, ports, and the other things that would benefit production than to bolstering state and local budgets in order to keep teachers and other civil servants employed.2 That may be a worthy goal in itself, but it hardly inspired managers to take risks. He further depressed any such urge by raising taxes. Into the bargain, his government also passed massive and complex pieces of legislation, most notably the ACA and the Dodd-Frank financial reform. However otherwise valuable, each turned business off risk taking further, the former by rendering it impossible for planners to calculate the cost of a new employee, the latter by raising uncertainties about the future costs and availability of credit. 

Most destructive perhaps was the administration’s aggressive regulatory agenda. However justified in other terms, the active rule writing and enforcement imposed increased costs on business and, worse, gave it the sense that government would behave in seemingly arbitrary ways. Whether that was a correct interpretation or not, either development nonetheless discouraged business expansion as well as hiring. The fate of the Keystone oil pipeline is indicative. The boom in US and Canadian energy production in what were previously unlikely places demanded new pipeline facilities to get the crude oil to refineries and get the natural gas to where utilities could use it. Obama regulatory bodies held approval in doubt for an unconscionable time, so long in fact that the Canadians gave up, decided to bypass the United States, and turned to a pipeline that would carry the tar-sands oil from the Rockies to refineries in the Atlantic coast provinces.3

The combined impact of these policies shows clearly in the data. Hiring proceeded slowly by just about any standard. Though eventually this long recovery has managed to bring the US economy back to full employment, at least by some measures, the unemployed had to wait a lot longer than in the past to find a position. On average the first three years of this recovery saw job growth of 83,000 a month, compared with 163,000 a month on average in comparable periods during past recoveries.4 The overall real economy throughout this entire recovery to date has expanded a mere 2.0 percent a year, barely over half its long-term pace and far short of the 4.3 percent averaged during past cyclical recoveries.5

Speaking directly to the depressed nature of these Keynesian “spirits” are the spending statistics for new equipment, facilities, and technology. In the entire recovery from mid-2009 through 2016, such spending increased at a yearly pace of only 4.0 percent, well short of the 7.1 percent yearly rate averaged in past recoveries or even the 6.1 percent yearly rate average after the 2001-02 recession. Had such spending matched its historic record, the overall economy would have grown 1.0 percentage point faster a year than it did and come much closer to its historic pace. More telling still, business during this time seldom exceeded by more than 30 percent its need to replace depreciated and obsolete facilities, well short of the 40-50 percent it has typically spent in past economic expansions.6

This lack of expansionary zeal not only has kept current growth rates slow, but it has also threatened the economy’s long-term productive capacity and efficiency. Only by spending on new equipment and systems can business bring the most effective technologies to bear on productive process, foster increased labour productivity, and so enhance profitability even as it lays the groundwork for wage increases. Such fundamental damage takes time to have effect, but government statistics indicate that it may already have begun to assert itself. Output per hour has risen at only 1.0 percent a year during this disappointing recovery, barely half the rate measured over the prior 40 years.7

Now Donald Trump, if he wants a healthier, more dynamic economy, needs to rectify this unfortunate situation. He certainly has made promises that enthuse business and industry. It would overstate to say that “animal spirits” have returned, but signs of change have emerged, even in just the few months since his election. Surveys show an uptick in optimism. More convincing is the acceleration in orders for new capital equipment. After falling 5.9 percent over the 12 months to last November, orders for non-defence capital goods grew 33.1 percent from last November to this June, the most recent period for which data are available. That amounts to an annual growth pace of 63.7 percent and is quite a vote of confidence.8

A similar picture emerges in figures on the first half’s gross domestic product (GDP).  Though GDP growth as a whole disappointed, showing only a 1.9 percent annual rate of expansion, the business sector reported a marked pickup. Capital spending by business overall, after remaining flat during the previous year, rose at a 6.2 percent annual rate during the first half. Spending on new structures, after growing a mere 1.9 percent during the previous four quarters, jumped at a 9.7 percent annual rate. Spending on equipment, where so much new technology is embodied, after falling 3.8 percent during in the prior four quarters, rose at a 6.3 percent annual rate during the first half.9

Such positive trends, though welcome, will nonetheless falter, unless this White House goes beyond promises and acts. It has begun, but the picture is far from compelling. Trump has ordered the various administrative agencies to review all rules, weighing the benefits of regulation against the cost to business, especially the impact on employment. In some cases, civil servants have re-interpreted existing rules to make them less burdensome and less constraining. More, however, is required to reverse the damage of the last eight years. The White House has hardly mentioned its campaign promise to serve the needs of business by refurbishing the nation’s basic economic infrastructure. Whatever it does in this realm must proceed in a way that protects public finances from excessive amounts of debt. Otherwise, business will simply exchange one depressing concern for another. The administration has put forward proposals for business tax reform and relief that, should they pass into law, would provide a considerable inducement for business to expand. Given the divisive nature of politics in Washington, however, progress on such tax reforms, or anything like them, is far from assured. 

What is clear is that Trump, however much people like or despise him, holds the key to sustaining this new favourable trend.

Meanwhile, the administration is a long way from relieving the uncertainties that still attach themselves to the ACA and Dodd-Frank. Quite aside from the complex moral/political questions involved, this effort must balance a number of contradictory elements even where only business incentives are concerned. Any replacement for either piece of legislation must take care to avoid imposing new uncertainties on business planners. On the ACA, in particular, any replacement will also have to offer something actuarially convincing. If it fails that test, business would not only hesitate over future strains on public finances but it would also anticipate the need for future, unknowable, and potentially disruptive adjustments.

The jury, as the expression goes, is still out. It will remain so for some time to come. What is clear is that Trump, however much people like or despise him, holds the key to sustaining this new favourable trend. Required changes need not cater to business to get a positive result. They need only remove the policies that so discouraged expansion in the past. If such efforts fail, the recovery will likely continue but at the slow pace, which some have characterised as a “new normal”, and that carries a longer-term risk to productivity, wages, and the economy’s overall production capacity. If, however, this White House succeeds to one degree or another in reversing the growth-squelching postures of the recent past, then the pace of hiring and overall growth should accelerate. Those who have dropped out of the workforce will return to gainful employment with more of the up-to-date equipment and technologies they need to enhance their productivity and the earnings potentials of their firms. The disappointing “new normal” of which people complain today will become a thing of the past.


Featured Image: Former President of America Barrack Obama and President of America Donald Trump ©;


About the Author

Milton Ezrati is Vested’s Chief Economist, a contributing editor to The National Interest, and an affiliate of the Center for the Study of Human Capital at the University at Buffalo (SUNY).  His most recent book, Thirty Tomorrows, explains how developed economies can cope with both globalisation and aging populations.



1. Keynes first used the expression in his opus, The General Theory of Employment, Interest and Money (London. Macmillan 1936, pp. 161-162.) Strictly speaking Keynes used the expression to refer to an irrational optimism that drives people to act positively beyond the guides of calculation or optimisation. The text makes clear, however, that should any policy or experience contrive to render such spirits “dimmed”, to use Keynes’ word, this healthy urge to expand disappears, and the economy suffers accordingly.
2. According to Congressional Budget Office reports ( on the impact of the American Recovery and Reinvestment Act, only some 15.2 percent of the spending went to housing, transportation, energy, water, and commerce, while some 44 percent went for direct transfers to individuals and what was called the “State Stabilization Fund”.
3. See New York Times archive of the news on this subject,
4. Author’s calculation from data on the Department of Labor, Bureau of Labor Statistics website,
5. Author’s calculation from data on the Department of Commerce, Bureau of Economic analysis website,
6. Ibid.
7. Author’s calculation from data on the Department of Labor, Bureau of Labor Statistics website,
8. Author’s calculation from data on the Department of Commerce, Bureau of the Census website,
9. Author’s calculation from data on the Department of Commerce, Bureau of Economic Analysis website,


The views expressed in this article are those of the authors and do not necessarily reflect the views or policies of The World Financial Review.