Is Keynesianism Running Dry?

Tyler Durden's picture

Via Perspectives from Pictet,

Why policymakers must be brave and innovate with economic policy

Even though the policy mix is extraordinarily stimulating, developed-world economies just cannot embark on a virtuous circle of recovery. Worse still, governments, whose finances have been bled dry, are powerless to boost demand. This all suggests Keynesian policies have failed. A fresh approach to economic policy is needed. But policymakers will need to be both bold and brave.

The current state of economies is serious and worrying: although deliberate expansionary policies have been pragmatically implemented since March 2009, governments and central banks throughout the developed world have been unable to push recalcitrant economies back into the virtuous loop of self-sustaining recovery. The implications are plain for all to see: once governments apply a brake to public spending, growth slows considerably. Economies of the developed world have become addicts, ‘hooked’ on government spending.

The annualised rate of US economic growth has slackened to no more than 2%, down from 6% in Q2 2009, in spite of the mix of reflationary fiscal policies and the US Federal Reserve’s unprecedented quantitative easing. Europe’s economies are heading for recession, crippled by draconian budget austerity in many countries intended to redress astronomical public-sector deficits and national debt. Worst-case scenarios are pointing to Europe’s GDP shrinking by 2% over the coming 12 to 18 months. This calamitous failure of economic policies will have serious social, political and, self-evidently, economic repercussions.

Keynesianism running dry

Both US and European economies see jobs being destroyed once growth slows below 2%. If recession bites, obviously jobs are wiped out on a more massive scale and household income shrinks. Unemployment and contracting income penalise social well-being in developed nations: the number of people living below the poverty line is rising non-stop. Although this stratum of society was considered just a marginal fringe twenty years ago, it now accounts for between 10% and 20% of the total population in most developed economies (15% in the US, 12% in France, 21% in the UK).

Draconian austerity measures in a setting of lacklustre growth make a recipe for despair in the population, creating a breeding-ground for ever more popular extremist political parties. Recent general elections in Greece, France, the Netherlands, Austria and Sweden have seen farright populist and parties disturbingly making electoral breakthroughs or scoring big gains. Modern societies can no longer promise future generations a better, brighter future. Political instability precludes the vital nationwide consensus being formed to push through measures required to rebuild the foundations of a solid economy.

This economic-policy stalemate, in particular, is becoming increasingly blatant. Traditional Keynesian remedies are proving both unworkable and ineffectual. Record public deficits of 10% of GDP in 2009, inflated by the host of budget reflationary programmes, have resulted in governments being either de facto or potentially insolvent. Since then, with no financial ammunition left, governments have been unable to push through any further reflationary measures and compensate for the drop in wages by distributing increased social-welfare benefits. Worse still, by slashing public spending, a strategy regarded by economists as essential to restore countries’ sustainable financial viability, policymakers are making matters worse: as growth slows, deficit-cutting targets are being missed and the trajectory on public debt is moving ever further away from its optimal pathway. With no credit to dispense, State-administered Keynesianism is, in effect, bankrupt as government spending levers can no longer be activated.

A new role for government needs to be envisaged

How serious have things become?
After all, Keynesianism’s limitations have been apparent for some time. By seeking to kick-start growth by boosting consumer spending, it has become clear that modern economies no longer rely on consumption. To be more precise, the dynamics of virtuous, self-sustaining economic growth are not triggered by consumer spending. In contrast, the dynamics feed through eventually into consumption – they are instigated by investment and, by extension, jobs. This key focus on the investment/employment duo has been noticeably lacking in the US and European economic policy mix over the last four years. The time has come to review the role government and the State, shown now to be effectively toothless, play in influencing economic growth.

As governments alone are no longer able to spend and stimulate growth, they need to turn towards encouraging spending by other economic players, especially those who can intervene effectively to boost jobs and incomes, i.e. businesses. To do that though, politicians will need to be both bold and brave. At a time when capitalism is being accused of the most reprehensible wrongdoings, policymakers will need to display great courage to promote the virtues of entrepreneurship and business. However, while Keynesianism may be looking bankrupt, demand-side economic policies are looking dead in the water as well. As a result, moving to economics geared to boosting supply is absolutely indispensible. The rub is that the policies for this still have to be invented.

There has, however, been one illustrious precedent: the supply-side economies implemented with success by the Reagan Administration in the early 1980s, followed by twenty-five years of sustained growth in a period referred to as the era of the ‘Great Moderation’. The fresh approach to economic policy now will need to be generous in seeking to promote innovation. Investment and job creation tend not to happen without a major wave of innovation. Of course, innovation cannot be decreed into existence. But it can be nurtured through fiscal incentives that favour risk-taking. Huge tax breaks for R&D and capital spending would be likely to form the major building-blocks of any future budget policy to stimulate supply. Making such moves would call for great political courage as, nowadays, it is regarded as socially equitable and electorally advantageous to tax – even so heavily as to veer close to financial repression – those generators of wealth most liable to be most useful in boosting supply.

A fresh approach to economic policy

There is a second challenge though.
Unchecked, supply-driven economic policies tend to lead to excess. Modern economic history covering the Great Moderation period has demonstrated that overgenerous use of credit always ends in tears. First of all, in the 1990s, the belief that boom-and-bust cycles were things of the past thanks to the advent of revolutionary new information and communications technologies lured companies into running up huge borrowings beyond what their returns on equities could withstand. This sparked the bursting of the bubble and TMT (technology, media, telecom) crash. Then, from the early 2000s, it was households’ turn to overstretch themselves with debt, culminating in the sub-prime crisis. Moreover, innovation per se should not be regarded as universally wonderful. Just take the example of financial innovation which, unregulated, lay behind the ballooning debt.

Excess lending will inevitably lead to artificially-driven economic growth as it breaks the link between the cycles of innovation and economic growth. The virtuous qualities of real economic growth evaporate and become unreal. Growth fuelled by excess credit leads inevitably, as night follows day, to ballooning bubbles, burst by devastating crashes on financial markets. Fresh and well formulated supply-focused economic policies would need to take due account of such undesirable and destabilising implications. This concern points to a new role for central bankers, implying, by osmosis, a fresh style of monetary policy being needed as well. Inflation targeting (keeping core inflation around 2%), the sacred cow for central banks since the early 1980s, is no longer appropriate for either today’s growth conditions or for an innovative, supply-geared economic policy mix.

Imagination will be required to forge this new role for central banks. Not to mention the bravery in calling into question the orthodoxy that has held sway for so long. In the past though, periods when there have been serious ruptures in cyclical economic patterns have often seen major shifts and key policy breakthroughs. However, all the courage and boldness will be futile if the will to bounce back is lacking. The challenge is most daunting. The direction of economic policies over the next few years will dictate the structural trends for developed economies for decades to come. We just have to hope that policymakers will dig deep amid all the grave economic, political and social crises today to find that courage to be bold and innovative.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
LetThemEatRand's picture

If John M. Keynes had simply been named John M. Ponzi instead, it would be so much easier for the average guy to understand.  

But supply side tax breaks are the answer?  Reagan studied at the Ponzi school with the rest of them.  

LowProfile's picture


Why policymakers must be brave and innovate with economic policy







vast-dom's picture



praxeology biyatchez!

Max Fischer's picture

The reason Austrian economics has not been embraced is because the entire school is based on the reduction and containment of inflation.

Inflation is dead; thus, Austrian economics is dead. Depending on how you want to measure the market's anticipated inflation rate, it's anywhere from 0% (even less) to 2.07%.* Basically nothing.

The threat right now, and for the past five years, has been a sweeping deflationary buzz saw that cuts across all asset classes and sends the world economy into a devasting deflationary collapse. The only thing you hear from the Austrians is: good! The world deserves the collapse!

And this is pretty much why no one takes Austrians seriously. Largely, they're just a bunch of vindictive pricks who want to watch the world burn.

* Per ZH famed contributor, Bruce Krasting, the only meaningful yardstick to measure inflation is taking the Ten Year spread between Coupon and Inflation Index bonds.

Edit in: By the way, Keynesian economics hasn't been practiced in the US since before Nixon. How can one possibly blame Keynesian economics for the current crisis and the failure for a meaningful rebound when it hasn't been a part of federal policy in many decades? Just more right-wing bullshit.

TheSilverJournal's picture

The real question is why is "the market" is so afraid of deflation?

For some reason, the connection between falling asset prices and depositors being able to withdraw their money is rarely addressed, but yet, "the market" is deathly afraid of it.

Just because it hurts for those in the ponzi for it to be shut down, doesn't mean that even more people and resources should be suckered in to keep it going. Instead of talking in negative terms about how the world deserves collapse, the talks needs to develop into a much more positive approach. Once resources can be allocated more efficiently, productivity will boom.

economics9698's picture

You are so much nicer than I am.

LetThemEatRand's picture

You government contractors are so naughty!

HoofHearted's picture

Max Gischer, superdolt, or whatever it says about you...the way YOU measure inflation it's between 0 and 2.1%. But you have taken the Bernanke KoolAid th Fed spews out. Hell, if we go over to John Williams' Shadowstats, we'll see numbers like 7 or 8%. And if we just compute inflation without all the hedonics, we get something more like 5%. (And to think that our dumb ass government once used this way to compute official inflation. The nerve!) Moreover, if you have kids like me, you see inflation being much higher than that on the things that actually matter. Food is so much more expensive while my house payment hasn't gone down as the Bernank computes it should. Instead it is HIGHER because the idiots in my local government cannot live on a budget like my family has to. Instead they keep raising my taxes to pay for their idiocy...

Is Max Fischer the alter ego of MillionDollarBonus? They're just about as dense as the other.

TheSilverJournal's picture

Unlike Max, MDB knows exactly what he's saying. I tend to believe MDB is doing ZH a favor by setting up the status quo card an letting us get some practice taking punches at him. Either that, or he's a paid shill who knows and believes in free markets at heart but is selling out. Or, MDB could be practicing to be an economics professor and wants to make sure he's going to get the spot.

PeterSchump's picture

Deflation only sucks for the levered. Since banks and bozos are levered, the unwashed are brainwashed to believe prices returning to reality leads to Armageddon.

TheSilverJournal's picture

Reality is measuring in ounces. Real money can't be run off a printing press or created with a keyboard. The deflation in terms of PMs will be massive, while the inflation in terms of currencies will be massive.


economics9698's picture

Max Fisher...You are full of shit.  First off Austrians think the CPI is bullshit.  Its equivalent to measuring a bee swarm and hoping to get something close to reality.

Second deflation is the normal course for prices with a gold standard.  When inflation is zero it does not mean the Fed is not printing and counterfeiting, maybe they are, 1980s, Volker.

Third the reason Austrian want the collapse is so we can get a job.  As long as the money is flowing prices and resources cannot adjust and be put back into circulation.  You need the bust, lower prices, and readjustment to move resources from unproductive uses, Solindra, to productive uses, shale oil exploration, driven by the private markets.

Reagan was a Keynesian, spent like a MF.  Bush I, II, Obama Keynesian on steroids.

It’s pretty obvious you are a retard and should not post on these boards with this much talent to call your ass out.


Max Fischer's picture

You want a collapse so people can get jobs? In a collapse, money doesn't flow. Idiot. I can't believe that someone would actually believe that all we need is an economic crash for job growth. So fucking dumb.


Speaking of jobs, aren't you the anarcho-capitalist who works as a government contractor?


You guys are HILARIOUS!

BlackGoldTexasTea's picture

Economics are irrelevant, anyway.  The point of most economic theories is to grow the economy.  Economic growth is finished.  Human population is in overshoot, as oil and other fossil fuels temporarily increased the carrying capacity of the planet.  People are what make up the economy.  Peak oil.  Peak people.  Peak economy.

The collapse is coming one way or another, but they might as well prop it all up for as long as they can.

The collapse of the US dollar means the ships stop coming to America - an immediately balanced trade deficit, even the ones that deliver our precious, precious 10 million barrels of oil imports every day.  Such a huge disruption in the oil supply will basically shut down the country.

Collapse will lead to job growth, but only after it reduces world population by several billion.  The Romans had an empire without oil.

At least all currencies hold dollar reserves.  Dollar goes down, they all go down.

Anusocracy's picture

Peak economy will be reached just before WW3.


That's also when peak technology will be reached.



BlackGoldTexasTea's picture

Peak economy was reached in 2008.  I'm talking about the real economy, not the GDP data from governments.

It will be like a roller coaster, until the currencies finally fail.  Economy will start to grow then hit high oil prices and be unable to grow and begin to contract, lowering oil prices.

Although, I do agree that World War III is quite likely.  But, the people in power know that will destroy the planet for them and their children too.  So, we shall see.

Lucius Cornelius Sulla's picture

Nobody wants a crash.  But 30 years of unsustainable trade and government deficits have created conditions whereby that is exactly what we will get.  There is no choice in the matter.  The real idiots are the psychopathic lunatics that have been in charge of the asylum for the past 30 years.  Keynesians and their bankster accomplices are like cocaine addicts who have finally reached the point of final burnout.  They will continue to prop up this fraud as long as possible, stealing from the public to feed their addiction.  The real trajedy is the wake of destruction suffered by the innocent.  But that is an all too common theme in history.  I say we are nearing a Louise the XVI moment.

nohweh's picture

  "We just have to hope that policymakers will dig deep amid all the grave economic, political and social crises today to find that courage to be bold and innovative. "           


Is that all. Just who the fuck are these policymakers and who do they work for? Thank God for the policymakers.

Barking Spaniel's picture

Max, I recommend you work for Massengill to be the mascot for their newest douche-related product.

robertocarlos's picture

Describes me to a tee. Let the fucking world burn!

Max Fischer's picture

Exactly. Describes every single one of you frozen-hearted, GI Joe wanna-be freaks.

Let the world burn! Fuck everyone!

On a psychological level, one must wonder where that despicable, yet proud, inhumane mentality comes from?

ArkansasAngie's picture

Price discovery ... Economic value.


Assets that are mispriced because their value has been based on imaginary, excel sheet in the sky, Bennie numbers will not promote organic growth.


I don't want bad things to happen.  The problem is bad things are happening now.  And these bad things today will not stop happening until moral hazard has been swallowed by thosse who are insolvent.  Then things will get better


So ... yes ... rip that bandage off.  Perform surgery to remove the rot and lets get on with living our lives.  


Misallocation is a bitch.



Turin Turambar's picture

Hey Einstein,
Since you know so much about Austrian economics,name me a few books you've read. I can tell by your dumbass comments that neither Human Action nor Man, Economy, and State will be on the list. Do you even have a list of ANY books about the "Austrian" school? My guess is ZERO!

Ignorant dumbass.

A Nanny Moose's picture

an excellent demonstration of your utter lack of understanding of the Austrian School. Keep up the good work Maxi-Pad.

TheSilverJournal's picture

It's funny how "austerity" means less spending on the people, and not less spending on repaying bankers.

This is not to say I'm against austerity, but there should be much more austerity, including defaulting on debts that are impossible to pay back.

Sudden Debt's picture


TheFourthStooge-ing's picture


But supply side tax breaks are the answer?  Reagan studied at the Ponzi school with the rest of them.

Reagan broke the tax-and-spend addiction of his democratic predecessors which was dragging the nation's economy down.

Reagan's courage to stride forth in a new direction brought hope to America, and his bold policy of borrow-and-spend is responsible for the prosperity we enjoy today.

economics9698's picture

Reagan cut the top rate from 70% to 28% which increased tax collections 69% but he increased spending 76%, with the accompanying deficits.

Reagan increased social security taxes and collections increased 96%, these taxes fell on the middle classes.  Its a myth Reagan broke the tax and spend addition, he was clever to create a new elite top 20% that enjoyed unprecedented prosperity while taking a shit on the middle class.

As for the spending he set the post WWII record of a 6% of GDP budget deficit in 1983, a record that stood until 2009.


Max Fischer's picture

Reagan increased SS tax on the middle class to pay for the tax cuts for the rich, you idiot. The middle class was told by Reagan and Greenspan that the extra SS taxes would create a pool of additional funds, so that when baby boomers retire, the funds would be available. Well, guess what? The only thing in the SS cookie jar are IOU's, and that's why Americans are being prepped to accept LESS SS output, even though they had to increase their imput.

Instead, Reagan took that extra SS money and fucking SPENT it! That's how he balanced his budget, while still cutting taxes for the rich and still spending money on the huge 1980's military expansion.

It was THEFT! Just another example of the middle class getting FUCKED for the benefit of the 1%.

Dude, you're dumb.

PeterSchump's picture

All SS tax increases went into Al Gore's lockbox.

Lucius Cornelius Sulla's picture

Dude, you need to take Poli Sci 101.  All tax and spending bills must be approved by Congress.  Therefore, the Executive cannot cut taxes or spending.  IMHO, the real villians are the likes of Nancy Pelosi, Ted Kennedy, Barnie Frank, Christopher Dodd, Patti Murray, etc... etc...

Lucius Cornelius Sulla's picture

An important distinction to make about Reagon is that he (like any POTUS) can only recommend tax and spending decisions, but Congress has to approve them.  Reagon wanted to beef up the military so he went along with guns and butter without vetoing spending bills.  So in that respect, he was culpable.

TeMpTeK's picture

Keynesianism hasnt failed.... We just need more Cowbell....


Tom Green Swedish's picture

Reagan although not perfect was left with a big pile of garbage.  A failed Vietnam war. A huge energy problem. High Unemployment.  But at least he was not a Socialist.

blunderdog's picture

Cut taxes, raise spending, start more wars.

It's a time-proven technique.

economics9698's picture

For poverty and unemployment.

BigDuke6's picture

 "Recent general elections in Greece, France, the Netherlands, Austria and Sweden have seen farright populist and parties disturbingly making electoral breakthroughs or scoring big gains."

The socialists have imported too many voters for them to get far.

Civil war comes to europe with jihadi's pouring in from north africa.

oldmanagain's picture

No question that Keynes is a theory, a scientific theory at that, just as all science is a theory. What makes theory as physical law is the correctness of its theorems and math.  In this case, conforrmance to actually occuring in space and time.  So called, real world. On the latter, Keynes is king.  Austrian is nowhere.  A dream system favoring a few.

The support of the dream system, no regs, winner take all, is quite evident in our current situation.  Those Austrian "animal spirits" did us no favors. No, it is not about the FED. That is just misdirection of blame by stake holders trying to avoid the hangings.

Austrian econ is more like, let us rob you and it will make you feel better as part of the scam. You know you should of out sourced with us.  Your fault. We need to lower your SS and med payments to teach you a lesson. Remember, no law is good law, the animal must be fed.

Offthebeach's picture

Pop. The van from the Ted Kennedy assisted living on MLK Avenue is here. Time to go.

Lebensphilosoph's picture

There is no scientific economic theory.

Coke and Hookers's picture

Keynesianism is an instrument to falsify the economy like fake dollar printing plates. Well like real dollar printing plates too I guess.

The inevitable result of keynesianism is the replacement of real wealth creation with asset/income seizing, current and future, which is then pumped into the economy in the form of fiat. If there's measured growth as a result of this, it's almost certainly going to be fake. The end result of this is wealth transfer to the people who control money so I suppose you could call keynesianism a "wealth transfer instrument functioning through economic fakery."

sessinpo's picture

There is a distinct difference that people need to understand. Supply side is simply the government spending and expanding more to compensate for a weak economy. While it is fiscal, this has nothing to do with taxes. What Reagan did that was positive was to support lower tax rates which encouraged businesses to reinvest and also hire, thus the boom of the 1980s. Add in there the prospect of increasing interest rates (cost to borrow), it made more sense for businesses to reinvest savings. Reagan's mistake as with all politicians was to expand government and debt, a destructive trend that we still see today. Of course, during Reagan's presidency and later, you would not have heard much of anyone saying that the military buildup to defeat the Soviet Union was bad. They did get the results they wanted, but at what price? Keep in mind that Reagan could not do all he did without the consent of Congress. Back then, we did not have executive orders thrown around like confetti as we do over the last decade.

I'm not bashing your post. I am not for Keynes. I would like to see less government in almost all cases. Everytime they intervene, they take away freedoms and only delay the inevitable. Government cannot change market forces. They only manipulate them and delay the eventual result which is usually worse because of the intervention.

Ponzi on fellow ZeroHedger.

Sudden Debt's picture

I like it :)

ZeroSpread's picture

With Japan remaining the "standard" everybody likes to be compared to..  "are you Japan plus or minus"?

SheepRevolution's picture

Fuck Keynes. Banksters took advantage of his false theories, confusing everybody into believing that more debt can solve problems. More debt is what the banksters fought for the very first day US was founded (and even before that by the Rothschilds).


Keynesianism is as dead as it can be. What needs to become alive is the sheeple.


For Liberty!

ATM's picture

Keynes was a Socialist and his whole theory really invokes nothing more than a controlled economy. Governemnt in Keynes view should be the speed regulator of the economy. That power really means that government is the economy and controls the economy.

The US government was not granted that power by the people, no matter how many times we are indocrinated by the simple little phrase we hear daily, that the President "manages the economy".  I mean what the fuck?! We gave some dipshit community organizer, Maoist, dope head the power to "manage the economy"? (the same goes for any past POTUS as well) 

It really isn't in their job discription.


News flash: John Maynard Keynes is still dead.

Sudden Debt's picture

now subtract the local inflation rates and let's see if there's sill countries left on the surface.

I bet more would be at the bottom together with greece. Greece would be up because they are in a deflation trap, the US, Germany, France and The Empire of Belgium would be way lower because of their local inflation rates.