Keynesianism

By Benn Steil

The Congressional Budget Office estimates that the US budget deficit will reach $1.85 trillion this year and $1.38 trillion in 2010, 13.1 per cent and 9.6 per cent of gross domestic product respectively. Much more worryingly, it projects deficits averaging more than $1 trillion a year for the next 10 years, which will raise the US public debt-to-GDP ratio to more than 80 per cent by 2019.

 

By Roger E. A Farmer

“Before I draw nearer to that stone to which you point,” said Scrooge, “answer me one question. Are these the shadows of the things that Will be, or are they shadows of things that May be, only?”

Economic policy is in a muddle. Academic voices are flooding the blogosphere and the intelligent policymaker can be forgiven for being unclear as to which side to listen to. On one end of the spectrum are classical revisionists who blame government for distorting market outcomes. On the other are Keynesians who think that fiscal deficits will rescue capitalism from its excesses. Both are partly wrong. Both are partly right. 

Another ideological god has failed. The assumptions that ruled policy and politics over three decades suddenly look as outdated as revolutionary socialism.

“The nine most terrifying words in the English language are: ‘I’m from the government and I’m here to help.’” Thus quipped Ronald Reagan, hero of US conservatism. The remark seems ancient history now that governments are pouring trillions of dollars, euros and pounds into financial systems. 

Pinn illustration

What has Japan’s “lost decade” to teach us? Even a year ago, this seemed an absurd question. The general consensus of informed opinion was that the US, the UK and other heavily indebted western economies could not suffer as Japan had done. Now the question is changing to whether these countries will manage as well as Japan did. Welcome to the world of balance-sheet deflation. 

By Benn Steil

“Many of the most successful economics blogs promote communication within political groupings, not across them.  On the web you best build an audience by organising a claque and stroking its prejudices.  Extend elaborate courtesy to people you agree with and boorish contempt to those who do not get it.  Celebrate exasperation and incivility as marks of intellectual authenticity – an attitude easier to tolerate in teenagers under hormonal stress than in professors at world-class universities” (Clive Crook, FT February 8, 2009).

Two days before Clive’s column appeared, I experienced firsthand the econoblog treatment he describes.  On February 6, the FT published an op-ed by me (“Keynes and the triumph of hope over economics”) criticising the tendency of economists to invoke Keynes, rather than logic and evidence, in support of any and all forms of new deficit spending, which are now massed together under the cozy umbrella of “stimulus” – a term that closes discussion by simply assuming the merits it claims. 

By Peter Clarke  

For more than 20 years after his death in 1946, the name of John Maynard Keynes achieved a sort of posthumous veneration that mythologised him as not just a great economist but an infallible prophet. This happened on both sides of the Atlantic and across party lines. It was US president Richard Nixon who declared: “We are all Keynesians now.” Well, times change. Myths become vulnerable to debunking – and, if you wait long enough, to rebunking too. The Keynesian era came to grief in the 1970s. For about 30 years Keynes’s reputation languished. Then, in about 30 days, it has apparently been restored. 

By Roger Farmer

The US recession that began in December 2007 resulted in 403,000 lost jobs in September, 320,000 in October and 533,000 jobs in November. Projections for 2009 are ominous. 

We are all Keynesians now. When Barack Obama takes office he will propose a gigantic fiscal stimulus package. Such packages are being offered by many other governments. Even Germany is being dragged, kicking and screaming, into this race. 

By Niall Ferguson

In the Old Testament Book of Leviticus, God commands the children of Israel to observe a jubilee every 50 years. Nowadays we tend to associate the word with celebrations of royal anniversaries such as Queen Elizabeth’s golden jubilee in 2002. But the biblical conception of a jubilee was more precise: that of a general cancellation of debts. 

By Nariman Behravesh

The full fury of the two shocks that have hit the world economy – the financial crisis and record oil prices – is beginning to dissipate. Unfortunately, the full impact of these shocks on the real economy has yet to be felt.