Wikinvest Wire

Invoking Keynes

Monday, October 20, 2008

It used to be that the only time government spending would spiral out of control was when there was a war to fight.

A real war, that is.

Throughout most of the last few hundred years, you can look at measures such as inflation and see that monetary caution was quickly "thrown to the wind" when bullets started flying.

Largely due to John Maynard Keynes, that all changed during the 20th century and, since the last link between paper money and something tangible was severed in 1971 when Nixon closed the "gold window", it seems that politicians are all too eager to borrow vast sums of money and crank up the printing presses whenever economies sputter.

At some point, ever-higher levels of indebtedness and loss of confidence in paper money will cause these remedies to lose their effectiveness. Government measures such as the "debt ceiling" in the U.S. and "fiscal rules" elsewhere around the world are really a charade and taxpayers will eventually come to realize this.

Does a ceiling serve any purpose when it is regularly raised but never lowered?

In the meantime, politicians and economists continue down this increasingly worn path as evidenced by this report in today's Guardian about new spending plans in the U.K. to combat the economic slowdown.

Darling invokes Keynes as he eases spending rules to fight recession
The Treasury confirmed yesterday it intends to fast-track spending planned for future years as Alistair Darling signaled that he will use next month's pre-budget report to relax Labour's long-standing fiscal rules to head off the worst effects of the recession.

Over the weekend the chancellor indicated that the government would seek to reflate the economy with a period of targeted spending on large infrastructure projects. Darling said yesterday that the economic thinking of legendary economist John Maynard Keynes was coming back into vogue.
IMAGE"Much of what Keynes wrote still makes sense. You will see us switching our spending priorities to areas that make a difference - housing and energy are classic examples where people are feeling squeezed. What I want to avoid is getting ourselves in a position governments have done in the past, where you face an immediate problem and cut back on the things the country will need in the future ... we can allow borrowing to rise," he added.
The problem with allowing government borrowing to rise is that the debt never gets paid down - not in Britain, not in the U.S., not in Japan...

While Keynesian remedies were surely appropriate during the early and mid-20th century when there were other constraints on government largess, here in the 21st century, where there seem to be no limits to what the state can do, they are about to be put to the test.

Surely there is an expiration data on invoking Keynes.

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marku said...

What isn't remembered is the other half of Keynes prescription: That during the boom times the government should raise taxes and decrease spending to avoid long term deficits and bubbles.

Governments only applied the part about the ponies and the ice cream, and forgot about the cod liver oil.

Anonymous said...

This is because Govts are run by politicians who find it political suicide to raise taxes and or lower spending. This is the fallacy of Keynes, it doesn't work with real people. This is true of all cental planning and socialism. In case anyone missed it, just about all of our economists these days are Keynesians and thus are socialists....

Tim said...

Isn't that true of just about all of modern economic theory - it doesn't work with real people?

Anonymous said...

I like evolutionary economics
( )

Arrgh said...

Minor correction: The debt does get paid down in Canada, but we're not quite in the same league as UK, US, JP.

Anonymous said...

The real economic theory is called Austrian, and indeed centers around people being ... well, real people.

Such approach leaves less space for differential equations, so those expecting lots of math may be disappointed. But guess who correctly predicted all this mess.

Adam said...

Keynesian Economists like Noureil Roubini and Paul Krugman also predicted this mess.

Austrians don't have it all to themselves.

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