02/25/10 Stockholm, Sweden – The very birthplace of John Maynard Keynes, the United Kingdom, has become a petri dish in which to test his every economic prescription in a time of financial crisis. With a large and growing budget deficit, a declining pound, and accelerating inflation, the UK has been scrambling for a cure. And, for the most part, as in the US and elsewhere, the nation’s leadership has been looking to Keynes’ theories for guidance.
From a Bloomberg commentary by Matthew Lynn:
“Britain has been following the mainstream prescriptions of [Keynes'] followers more than any developed nation. It has cut interest rates, pumped up government spending, printed money like crazy, and nationalized almost half the banking industry.
“Short of digging Karl Marx out of his London grave, and putting him in charge, it is hard to see how the state could get more involved in the economy.
“The results will be dire. The economy is flat on its back, unemployment is rising, the pound is sinking, and the bond markets are bracketing the country with Greece and Portugal in the category marked ‘bankruptcy imminent.’ At some point soon, even the most loyal disciples of Keynes will have to admit defeat, and accept that a radical change of direction is needed.”
Is that necessarily true? Keynesians have a tendency to refer back to the standby answer that if the remedy didn’t work, then it should have been tried earlier, or faster, or with more vigor. Lynn has an appropriate response for that:
“The Keynesian consensus is that things would have been far worse without the stimulus provided by government. And if the economy isn’t pumped up with inflated demand, it will collapse back into recession. If it’s not working, that just proves the stimulus should be even larger.
“It is the argument quacks always push: If the medicine isn’t working, increase the dosage.
“And yet, reality has to intrude into this debate at some point. The deficit can’t get much bigger, interest rates can’t be cut much lower, and sterling can’t lose much more value.”
“Stimulating the economy isn’t working.”
Indeed. Given the sheer quantity of money pumped into the economy via stimulus and bailouts you would expect to see the UK having a much better recovery, even if it were still false and temporary like the current run-up in the US. It’s painful to consider the next leg down in the UK. The few brief signs of recovery to date have been frail, and have little potential to offer more than a brittle defense against the next downturn.
For more insight, read Matthew Lynn’s full commentary in his Bloomberg piece on how the deathbed of Keynesian economics will be in the UK.
Best,
Rocky Vega,
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They mean Neo-Keynesian. John Maynard would not have approved of much that is cast in his name.
The article indeed suggests a failure of applied Keynesian theory. A market-based view of the economic recovery in the US and to the degree it occurs in the UK and the contenent, identifies the vicious cycle of government stimulus and resultant danger for social equity.
The US economy is finally growing rapidly enough to boost employment. Still, a great deal of the expected surge may come in the form of further gains in productivity while employment lags behind. Productivity growth is usually welcomed as a sign of economic strength, but under these circumstances, its implications are negative for the spread of economic benefits from producers to the general population.
It is widely said that firms are reluctant to hire labor on a large scale because of economic uncertainty, and that would be normal in the early stages of a recovery. But there is another major deterrent to hiring which is larger this time, and that is the increasing burden of government spending that the government expects the private sector to shoulder.
Under Keynesian economics wherein government spending is alleged to be stimulative; and that in fact, in the US, a recent speech by Larry Summers, the White House economics chief, is already giving credit for the coming recovery to the Obama administration’s aggressive “stimulus” spending. However,
Classical economics makes much more sense: the resources the government gains when it spends deplete the resources that producers in the private sector need to invest in the creation of jobs. So the government cannot increase employment in the unhealthy sectors where it spends without a loss of employment in the healthier parts of the economy which are forced to pay for the spending. With this in mind, expect that sustainable growth rate of the US and euro economies to be less in the next ten years than in the last ten.
In the meantime, US economic growth continues accelerating out of its slump. Expect more impressive output growth figures ahead. The rebound is likely to continue until the economy re-achieves its pre-recession output level. There should be large employment gains as well, but a significant part of the output growth will be in the form of continued increases in productivity. The same condition extends to the continent. That’s because economic uncertainties, technological development and the costs of funding a vast increase in government deficits, are pushing employers toward smaller workforces. As a result, unemployment rates are unlikely to fall back to levels that existed before the financial crisis, and are likely to remain elevated indefinitely.
This means a dangerous widening of the gap between haves and have-nots. It also intensifies the vicious circle whereby national government is pushed toward more deficit spending to placate the losers in the game. Finally, the attempt to fund this spending on the back of the business sector cuts private-sector jobs.
Luis de Agustin