The euro-US madness

The last time I saw much mention of John Maynard Keynes, the great British economist, was during the Bush administration when the great financial crisis hit hard and the Americans and the Europeans made desperate efforts to get their economies upright. Even Germany became Keynesian, pumping in government money to re-float their industry.

By Jonathan Power

Published: Fri 10 Jun 2011, 10:47 PM

Last updated: Tue 7 Apr 2015, 9:50 AM

Today the Germans act as if Keynes is forgotten and the Obama administration and the UK won’t utter the word. Only the Nobel prize winner; Paul Krugman, in his New York Times column — who talks about jobs being more important than debt and deficits — brings the subject around to Keynes’ remedies for recession. Meanwhile, in the corridors of power a strange orthodoxy trumps Keynes at an awful price.

Everyone knows Keynes’ witticism, making fun of the economics professor’s ability to take the long view, no matter how much suffering there may be on the way. “In the long run we are all dead”, the world’s greatest economist sagely observed. Less well known are the arguments that come from his path-breaking book, ‘The General Theory of Employment, Interest and Money’, written in midst of the Great Depression of the 1930s. One of the most important points is that while in a time of recession it might seem good for individuals to save against a rainy day, it is bad for rescuing the national economy. What is needed is a fiscal stimulus from the mass of consumers spending almost up to their last penny.

It has been the fashion since Keynes died for many economists to deride him — not least the school of monetarists led by Chicago University’s Milton Friedman, who argued that money supply was far more important than fiscal policy in controlling an economy — not for them the great fiscal stimulus that Presidents Barack Obama and George W. Bush steered through Congress at the height of the great economic disaster three and four years ago.

Even whilst alive it was sometimes hard for Keynes to get an audience. He advocated that the Great Depression would be solved if governments borrowed and spent and thus put the unemployed back to work. Only the onset of the Second World War, with the fast build up of expenditure on war machines, implemented Keynes’ ideas and reduced unemployment as the economy purred once more.

In the US, the previous stimuluses under Bush and Obama, as some had warned, began to run out in 2010 and Obama, instead of braving Congress and going for further stimulus tacked before the wind of the Republicans who wanted tax cuts for their wealthy constituents and a sharp cut in social welfare programmes — policies which would throw back the US into recession and push up the unemployment rate from its already too high levels.

In the UK, the Conservative and Liberal Democrat government has already implemented these Republican policies and despite very low interest rates set by the Bank of England now presides over a floundering economy which has not done what the government predicted. Instead of a new shiny pared down economy, with its engines revving up for a surge forward, ready to attract new investment, it is moribund. They’ve simply drained the petrol from the engine.

In Europe, Keynesianism is now frowned on by the Germans who made their recovery, using Keynes’ prescriptions, early in 2009. They have pushed for the European Central Bank to start raising interest rates and they encouraged their colleagues in the European Union to come down like a ton of bricks on Ireland, Greece and Portugal. Aid is promised but only on condition that these countries slash their budgets, sending unemployment up and wages down. It’s all about cutting debt levels. Austerity is being institutionalised on both sides of the Atlantic. Yes, these countries have indulged in bubble economies and wasteful expenditures and bad expenditures need to be pruned but these EU policies are definitely not the remedy. Good expenditures, a debt moratorium or forgiveness and low interest rates are what are necessary right now.

A premature fiscal and monetary tightening in 1937 is what caused the Great Depression to continue only to be “saved” by the “Keynsian” arms spending of the Second World War— hardly the most moral way of exiting the world’s greatest recession. What do we need? Another war?

Instead in the US we have Obama bending before Republican mantras. In Europe we have the Stability and Growth Pact’s bylaws that require member states to maintain budget deficits under three per cent of GDP — rules that a few years ago France and Germany both ignored when they were in a trouble. Madness!

Jonathan Power is a veteran foreign affairs commentator based in London