Rarely
has an economic idea had such a brief revival. After
several years of almost undisputed sway of monetarist
ideology over economic policy makers across the world,
suddenly Keynesian ideas were back in fashion, in particular
the idea that active state intervention in the form
of increased state expenditure is necessary to bring
a market economy out of a recession or depression.
When the global financial crisis broke in September
2008, leading to what is now called ''The Great Recession'',
suddenly policy makers everywhere turned to Keynesian
ideas to rescue the world economy. Not only were governments
- especially in the developed capitalist countries -
required to spend or provide for huge amounts of money
to bail out companies in trouble, but they were actually
encouraged to spend much more to provide fiscal stimuli
to prevent recession.
This enthusiasm for strong fiscal intervention in the
face of crisis even infected the hoary old supporter
of fiscal rectitude, the IMF. In its annual flagship
World Economic Outlook which appeared in the midst of
the outbreak of the crisis in September 2008, the Fund
argued that ''Macroeconomic policies in the advanced
economies should aim at supporting activity, thus helping
to break the negative feedback loop between real and
financial conditions, while not losing sight of inflation
risks...Discretionary fiscal stimulus can provide support
to growth in the event that downside risks materialize,
provided the stimulus is delivered in a timely manner,
is well targeted, and does not undermine fiscal sustainability.''
(Page 34)
The G20 group of countries that set themselves up as
the power lobby to run the world also declared their
support for collective fiscal expansion in their early
post-crisis meetings. Even bankers and large multinational
company executives hailed this shift as necessary, even
critical, to save global capitalism.
And then suddenly, and so quickly as to be quite unexpected,
it was over. The brief honeymoon that financial markets
had with state intervention appeared to sour as soon
as the banks felt strong enough (as a result of the
massive bail-outs they had been given and the very low
interest rates that were applied everywhere) to manage
without any more direct funds. And they - along with
other financial players - turned on the source of their
deliverance, increased government spending.
The attacks began first in the financial press, with
fears being expressed about rapidly rising government
deficits and fears about the sustainability of government
debt levels. They then spread quickly to bond markets
themselves, which attacked any government that was perceived
as having a slightly weaker position in terms of aggregate
debt levels.
A more classic case of biting the hand that has fed
you would be hard to find. It turns out that of the
top ten countries whose governments saw a significant
deterioration in their fiscal balances in 2008, a majority
had actually been running fiscal surpluses just the
year before. And for the largest of such countries -
the US and Spain - the change in fiscal situation was
directly related to the large bank bail-outs that had
to be provided. Indeed, Spain, Mongolia, Iceland, Latvia
and Turkey had all been running fiscal surpluses in
2007. It was private sector irresponsibility that created
the imbalance and associated crisis in all of these
countries, but it was the government that had to step
in and save the economy as well as its most reckless
banks.
What they have now got for their pains is a prolonged
hammering from bond markets, which are demanding massive
cuts in public expenditure that would require enormous
sacrifices from their populations. So the banks are
putting pressure on governments to reduce government
deficits that their own actions necessitated, but in
ways that preserve their own incomes and profits while
imposing austerity on workers and other hapless citizens.
All this is particularly surprising because there is
no theoretical or empirical basis for deciding that
a particular level of public debt is more than what
is acceptable, or that a particular debt trajectory
is sustainable, or even that a particular level of fiscal
deficit will generate so much more debt over time. All
of these depend upon several other factors, none of
which is likely to stay the same. So, most predictions
of future public debt levels in any country, whether
they are pessimistic or optimistic, are equally unreliable.
In fact, countries have had debt crises with ratios
of public debt to GDP that are lower than half, and
some have managed to avoid debt crises even when their
public debt to GDP ratio has been more than 100 per
cent for a prolonged period. The confidence of bond
markets is driven not by superior knowledge or better
predictive capacity, but by a range of factors that
are hard to pin down. Indeed, it is likely that if financial
markets were to be confronted by confident governments
that insisted on co-ordinated and positive fiscal stimuli,
they would respond by accepting this and bond yields
would not rise so much even for weaker deficit countries.
Instead policy makers are joining the general tom-toming
about the dangers of fiscal deficits. Partly this reflects
the continued political power of finance in most countries.
But it also reveals the misplaced but unfortunately
common belief in each country that it can somehow export
its way out of trouble. Obviously, all countries cannot
do this. But as long as people everywhere continue to
accept the nonsense currently being peddled about economic
policy, the collective lemming-like march to economic
self-destruction cannot be stopped.
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