Wednesday, October 20, 2010

Europe Is Turning Its Back on Keynes

LONDON — The British economist John Maynard Keynes may live on in popular legend as the world’s most influential economist. But in much of Europe, and most acutely here in the land of his birth, his view that deficit spending by governments is crucial to avoiding a long recession has lately been willfully ignored.

In Britain, George Osborne, chancellor of the Exchequer, delivered a speech on Wednesday that would have made Keynes — who himself worked in the British Treasury — blanch. He argued forcefully that Britons, despite stumbling growth and negligible bank lending, must accept a rise in the retirement age to 66 from 65 and $130 billion in spending cuts that would eliminate nearly 500,000 public sector jobs and hit pensioners, the poor, the military and the middle classes because of what he insisted was the overwhelming need to reduce the country’s huge budget deficit.

In Ireland, where the economy is suffering through its third consecutive year of economic slump, Keynes is doing no better. Devastated by a historic property crash and banking bust, the Irish government is preparing another round of spending cuts and tax increases.

Combined with what Dublin has already imposed, the cuts could add up to as much as 14 percent of Ireland’s gross domestic product, an extraordinary amount for a modern industrial country. Ireland’s budget deficit reached 32 percent of total economic output this year.

Indeed, across Europe, where the threat of a double-dip recession remains palpable, what is most surprising is not simply that governments from Germany to Greece are slashing public outlays but that the debate hinges more on how fast to do so rather than whether such substantial cuts are the right thing to do under the current circumstances.

“Everything Keynes established about the primacy of maintaining demand at a steady pace is gone,” Brad DeLong, a liberal economist and blogger at the University of California, Berkeley, said mournfully.
Read the rest here.


Anonymous said...

Heh, heh.

1929 redux- this time with the right scenario- hands rubbing gleefully.

gdelassu said...

I think that Peter Dorman's response puts it very well: "[T]here are accounting identities that define reality for all economies, whatever their political leaders may want to believe. The one that matters right now is that the change in net private debt plus the change in public debt plus the surplus on the current account must sum to zero. Austerians who are keen to reduce fiscal deficits must believe that this will be counterbalanced by either less deficit reduction by the private sector or by a big increase in net exports by everyone, all at once (in our trade with Mars, I guess). In other words, holding the trade balance constant, you can’t get net debt reduction in one part of the economy (banks and households) without permitting more debt somewhere else (government). This isn’t about Keynes, it’s about the iron grip of arithmetic on the realm of the possible."