Attacking Keynes

If nothing else at least it’s steady work  

I have to face the depressing fact that economists will almost certainly never get over Keynesian economics. Aggregate demand is here to stay and a return to even some semblance of supply side economics is a near impossibility. It certainly never seems to occur to many of those making our collective economic decisions that the very cause of our dreadful economic performance were the stimulus packages that came before. 

So we have this article from the Financial Times that tries to puzzle over just how badly things have gone and to work out why. Its title is “What went wrong with the global recovery?” and was written by Gavyn Davies, who describes himself as someone who had “served as an economic policy adviser in No 10 Downing Street, an external adviser to the British Treasury, and as a visiting professor at the London School of Economics.” He is on the FT’s “A-list” of commentators. And this is what he comes up with:  

As recently as six months ago, mainstream economic forecasters were expecting real GDP growth to be comfortably above trend in 2011, and surveys of business activity were hitting new peaks. Of course, everyone knew that the underlying condition of the western economies was still very weak, but that did not seem to be sufficient to prevent a continuing normalisation of economic activity, with GDP returning slowly towards pre-recession trends. 

We now know that these expectations were extremely complacent. Real GDP growth in the US has slumped to around 1 per cent annualised in the first half of the year, and continental Europe has performed no better in Q2. Forecasters like Goldman Sachs and JP Morgan now estimate that the probability of renewed recession in the US is around one third. So what has gone wrong?

What has gone wrong? A good question indeed. First he looks at the supply side of the economy and provides a very minimal list of problem areas. Things have gone wrong but things always go wrong. If you look at the list he writes down these are the kinds of things that go wrong all the time. They are not major destabilising problems such as those that set the GFC going in the first place. All are the routine kinds of things that happen all the time. The two listed are the tsunami in Japan and the effect on oil supplies caused by the political instability in Middle East. 

But then he crosses over to the demand side. There he sees problems in the fiscal tightening that is going on by governments that have become terrified about the debts they are accumulating. (Obama is, of course, not afraid of anything like that but there are a few others who have become concerned in his place.) So in Britain’s major financial paper, the problem is with the lowering of public spending, not with its previous increase, and this is a problem compounded by households who are now reducing their own spending in the face of such depressing uncertainty. Thus, the serious problems are on the demand side of the ledger. Not enough buying. 

I imagine few reading this bit of doggerel today would have had the slightest problem with the analysis. Down the line mainstream Keynesian nonsense that only means that if you take it seriously, governments will slow the only thing that will ever get us out of these problems which is a serious reduction in public spending. 

Meanwhile, over at Reason in the US, the question Tim Cavanaugh asked is, “How Long Will It Take Keynes to Die?” The answer he gives after coming across by accident the economic views printed up in The New York Times: 

This is the kind of laziness that sets in when you never have to entertain a serious challenge to your ideas. It’s remarkable given that the ballyhooed and short-lived return of Keynes was not merely rhetorical. These ideas were put into action, at a cost of trillions of dollars that will someday have to be paid back. The result was either a recovery too microscopic to notice or no recovery at all. Everywhere except the Times, people have noticed. The rise of the Tea Party, the three-fourths majority in favor of a federal spending cap, and the midterm election results were all evidence that Keynesian intervention is no longer a marketable idea.

Sure, sure. It may be that it is we anti-Keynesians who are kidding ourselves. Reality versus wish fulfilment. What chance is there that reality will ever win? But we keep at it. If nothing else, at least it’s steady work.