It is done and dusted. Keynesianism is dead and buried at a government level. Mind you, like those intrepid Japanese soldiers who were still fighting the war years after it had finished, Mr Geithner is still around with his fondness for fiscal stimulus; and from a country whose government is borrowing 40 cents of each dollar it spends and whose debt is over $14 trillion. And then there is José Barroso, President of the European Commission, and former Prime Minister of Portugal:
It is true that we do not have much room for a new fiscal stimulus. But that does not mean that we cannot do more to promote growth. First, those who have fiscal space available must explore it – but in a sustainable way. (European Parliament, 28 September 2011.)
Fiscal space! Countries with fiscal space; who could they be within Europe? Twenty one of the 27 EU countries are in the OECD. All of these EU nations, according to the OECD, ran a budget deficit in 2010. The aggregate deficit for the 14 countries in the Euro area was 6 per cent of GDP and their gross government debt was 93 per cent of GDP.
It would have been helpful if Mr Barroso had identified those countries with fiscal space. Rather than using their spare cash to mend bridges or perhaps take Mr Swan’s advice and install pink batts or build school halls; maybe they could be persuaded to use it to help bail out Greece or Italy or Ireland or Portugal or Spain, or those like France and the UK (and even Germany) whose positions are only a measure less parlous.
It is extraordinary that an economic theory of such limitations with a history of such demonstrable failure can survive; even if only in the shallowest of minds. With Europe absolutely wallowing in debt and on the brink of contagious defaults, and with fiscal consolidation the only remedy, Mr Barroso clings to a theory that bears much of the responsibility for the co-existence of economic stagnation and the current massive debt crisis. How can it be explained?
The truth of the matter is that it can’t be explained; it can only be rationalized. Before Keynes, economists knew that the economy was a complex matrix of many different matching supplies and demands and that a recession could result if the balance became unstuck. They knew that forces would then be set in train to rebalance the economy and restore it to health. In these circumstances, it would not have crossed their minds that large dollops of money spent willy-nilly by government would be at all helpful in restoring economic balance. In fact, they would have undoubtedly thought, and rightly, that it would throw the economy further out of balance.
Then along came Keynes and his Keynesians. Look thickheads, they said, spending (C plus I plus G) equals production. So increasing G is bound to increase production and you’re just trying to be too clever by half and make things more complicated than they are. Effectively, those opposing the Keynesians were shouted down. That is clear if you read the early debates. Henceforward, the sceptics existed in only small groups whispering their heresies for fear of being shunned.
Governments found in Keynesianism a beguiling solution to economic recessions and one that allowed them to spend – with photo opportunities – and seem virtuous at the same time. Being a Keynesian became not only de rigueur but the only professional option if you wanted to get ahead; and who doesn’t. Keynesian economists multiplied greatly in number and quickly filled public servant positions throughout the world and overflowed into universities, into international agencies and the media. A powerful conventional wisdom developed. Error proved no impediment to advancement and popularity; as so often it doesn’t.
For many years Keynesians were “proved” right in their own minds. All economic recoveries were attributed to Keynesian intervention, despite the inconvenient fact that economies had always recovered long before Keynes had his insight. All prolonged recessions, it was claimed, would have been longer and more intense without Keynesian intervention. It worked, whether things turned out well or badly.
The GFC and now the global government debt crisis have finally laid bare the truth. Delusions have been stripped away. Realty has caught up. Deficits and debt and high unemployment now have Keynesians squirming. Their remedies have become poisonous to governments so long in their thrall. Nobody is buying the story anymore; well, nobody, except the stragglers such as Messrs Geithner, Barroso, and Swan.
It is difficult to imagine the anguish of those economists whose whole life of study and work, and sometime scholarship, has been spent absorbing and purveying a complete fiction. It is a personal tragedy for them but, at the same time, a giant leap forward for good economics.
Consider this for a storyline: unemployment is up by millions and debt through the roof but it would have been worse without our Keynesian remedies. Really; pull the other one. It is amazing that such a bill of goods was ever bought.
“There are some ideas so wrong that only a very intelligent person [or apparently economists and politicians] could believe in them.” (Orwell)