Sunday, August 19, 2012
‘The high-water mark of Keynesian economics’
The
Telegraph’s Liam Halligan has a smart column that traces the high-water mark of
Keynesian economics to a speech by then Prime Minister Jim Callaghan at a Labour
Party conference in 1976. Personally, I associate the peak of Keynesianism with
Richard Nixon’s famous quip about economics after he yanked the US off the gold
standard in 1971, but I catch Halligan’s drift.
That
doesn’t mean Keynesian economics were proven completely wrong in the 1970s.
Rather, it meant the long-time abuse of Keynesian policies by the left – by
doing what they always wanted to do in the first place, i.e. spend, spend,
spend, no matter what the economic justification – had finally reached it
natural conclusion: national bankruptcy. Non-stop Keynesian spending can and
will wreck an economy.
But
that doesn’t mean that occasional and temporary use of Keynesian policies can’t
or won’t work, particularly during economic emergencies. The government sometimes
has to step in -- as the federal
government did in the 1930s and after 2008 – to stabilize an economy, with
either massive spending or tax cuts or a combination of the two.* But the key
is not to make those deficit-causing steps permanent, ongoing features of
government policy. That’s the “abuse” phase of Keynesian economics.
FYI:
Halligan rightly notes that the real problem facing the U.K. today is the
woeful condition of its banking system, not whether the government is spending or not cutting enough. The US economy faces the same challenge.
*
No matter what the ideologues may say, Keynesian and Supply-Side economics are
just kissing cousins in my book. They both rely on government fiscal policy and
strategic use of deficits to stabilize or jump-start economic activity, and they’re
both constantly abused by politicians on the left and right.
