Keynesians fall out of favor

Published 5:00 am Thursday, October 21, 2010

LONDON — British economist John Maynard Keynes may live on in popular legend for his global influence. But in much of Europe, and most acutely here in the land of his birth, his view that deficit spending by governments is crucial to avoiding a long recession has lately been willfully ignored.

In Britain, George Osborne, chancellor of the Exchequer, delivered a speech Wednesday that would have made Keynes — who himself worked in the British Treasury — blanch. He argued forcefully that Britons, despite stumbling growth and negligible bank lending, must accept a rise in the retirement age to 66 from 65 and $130 billion in spending cuts because of what he insisted was the overwhelming need to reduce the country’s budget deficit.

In Ireland, where the economy is suffering through its third consecutive year of economic slump, Keynes is doing no better. Devastated by a historic property crash and banking bust, the Irish government is preparing another round of spending cuts and tax increases.

Indeed, across Europe, where the threat of a double-dip recession remains palpable, governments from Germany to Greece are slashing public outlays. But the debate in Europe is more on how fast to cut government spending rather than whether such reductions are the right thing to do under the circumstances.

“Everything Keynes established about the primacy of maintaining demand at a steady pace is gone,” Brad DeLong, a liberal economist and blogger at the University of California, Berkeley, said mournfully.

“Europe obviously thinks it can focus on sound finances while the U.S. manages world demand,” he said in a telephone interview, “but unfortunately we are not doing that.”

Joseph Stiglitz argued that the British government’s plan was “a gamble with almost no potential upside” and that it would lead to lower growth, lower demand, lower tax revenues, a deterioration of skills among the unemployed and an even higher national debt.

“We cannot afford austerity,” he wrote in The Guardian.

DeLong and others on the left have long argued for more stimulus spending in the United States and abroad to lift growth, even if deficits rise temporarily as a consequence.

While that notion may have its adherents in the White House and among many U.S. and European academics, in Europe there is hardly a policymaker to be found who is making the argument that governments need to spend more, not less.

This is particularly true in Britain, where a combination of collapsing tax revenues and government spending to prop up banks and support the unemployed during the financial crisis has contributed to a budget deficit equal to 11 percent of gross domestic product, second-highest in Europe after Ireland.

“Keynesians are regarded here as heterodox, not orthodox,” said Andrew Lilico, an economist at the London-based research institute Policy Exchange, which has close intellectual ties to the Conservative Party. “And it goes back to one thing: We have this internal fear of losing control of our deficits and having foreigners telling us what to do. There is also a sense that deficits of this scale are morally lax.”

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