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Is Keynesianism Running Dry?
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 dot.com 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.
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No lie. Oil has gone from $3/barrel in the 1970s, to $90/barrel - when do you figure it'll dawn on Americans that it's time to move on?
What we should do put photovoltaics on a lot more roofs. The price of PV has dropped like a rock*. PV is already competitive with grid electricity (0.16/kWhr) in Europe and the US east coast, and dropping quickly. Put them on a ton of roofs, with an intelligent grid. Switch to battery or hydrogen fuel cell-driven vehicles for the short-haul fleet; there's your peaking electrical storage, too. Let the Arabs get back to herding goats.
*Which, BTW, is why Solyndra failed.
Actually that is just another of your endless lies.
http://www.forbes.com/sites/timworstall/2011/09/17/solyndra-yes-it-was-p...
and
http://archive.mises.org/18586/quick-video-on-the-solyndra-scandal/
Now you can go on griping about corruption hypocrite while never connecting your Beloved Leader Obozo to any of it aka providing cover.
Why do you figure that Pictet (author of the post) only looked at data through 2009? We're more than halfway through 2012. If he'd looked at the newer data, he'd have arrived at a different conclusion.
US GDP resumed it's climb in 2010. US total (public and private) debt/GDP has been dropping since 2010. Same for South Korea and Australia.
http://www.usgovernmentspending.com/spending_chart_2000_2012USb_13s1li011mcn__US_Gross_Domestic_Product_GDP_History
http://www.mckinsey.com/insights/mgi/research/financial_markets/uneven_progress_on_the_path_to_growth
Choose your theory based on the facts; don't choose your facts (like Pictet) based on your theory.
Blah,blah,blah...You're just another lying leftist sack shilling for your bankster overlords.
http://moneymorning.com/2011/08/23/gdp-lie-time-for-new-measure-of-econo...
The EU are the insane Keynesian overlords.
C'mon Germany grow some testicles.
oh also I just wanna add that deflation is a natural rebalanced of prices, Keynesian determinism is unnatural bizarreness. A dead science, that will be put to death once the whole thing caves in...6mths out.
Pain is part of life.
And yes, the German's will start to get frisky on the inflation. That nut-case Bernanke officially states that QE3 is coming, oil will be bid over 100. Will slam inflation into the French commies and the complacent German's
Imagination will be required to forge this new role for central banks...
Drivel. Central banks have caused the wealthy to own it all and even now they work only for the wealthiest few. The central banks must die in order for things to improve for most people.
Back in the glory days of Keynesianism (the 1950's), one dollar of new debt produced about three dollars of GDP growth. Nowadays, it takes three dollars of new debt to produce just one dollar of GDP growth.
The "Keynesian multiplier" is just an expression of the marginal utility of new debt. As long as the [Delta]GDP / [Delta]Total Debt is this far below one, then Keynesian stimulus is pointless.
The argument for stimulus (translated into Plain English): "We need to go broke really, really fast for a while, and if we're lucky, someday we'll go back to going broke slowly... like we were back in the 80's, 90's, and 00's."
As Canadas currency melts....literally
http://www.accuweather.com/en/weather-news/canadas-new-currency-melts-in...
Most of my money is in hard assets. mostly change. I don't like the plastic money.
Can't even counterfeit right with a license to do so-
Keynesian Economics was created to create problems and not offer solutions. That seems to be a radical statement however, when you judge that statement in the light of the writings of those who knew John Maynard Keynes and his economic theories, it becomes apparent that they were well aware of the effects that Keynesian Economics would have on the well-being of the economy and that those effects would create the need for an ever-increasing amount of government intervention. Perhaps the clearest explanation of the effects of Keynesian Economics can be found in the writings of Keynes’ contemporary and Fabian Comrade John Strachey. Strachey stated that Keynesian Economics was “an indispensable step in the right direction. The fact that the loss of objectivity, and the intrinsic value of the currency which is involved (i.e., inflation) will sooner or later make necessary, on pain of ever- increasing dislocation, a growing degree of social control . . . for the partial character of the policy will itself lead on to further measures. The very fact that no stability, no permanently workable solution can be found within the limits of this policy will ensure that once a community has been driven by events to tackle its problems, in this way, it cannot halt at the first stage, but must of necessity push on to more thorough going measures of re-organization."
Sad to see the continuing discussion on "economic policy" and "economic theory."
A mix of denial, fear, catharsis, confusion, and an overload of what-to-do?
There is no policy, and there is no theory.
There is, though, the grand fallout of simple, stupid, self-absorbed, and evil minds in places of influence and control.
Welcome home.
Keynes is running dry. What needs to dry out is the tax and spendaholics in Congress who are using Keynesian economics as a crutch. Keynesian economics is to politicians what a study that says drinking red wine is good for your health is to an alcoholic.
Pulp Cutter ? Do you provide pulp to the American Banknote Company ?
When did the USA first go bankrupt? 1786? And it , the USA, was dissolved in 1871? The whole thing is a lie. We're just going through the motions. I don't think there is a plan.
Bold and brave policymaker. Sounds like a mousetrap.
LOL, go ahead Bernanke and the Fed policy makers light the inflation fuse with QE3 and QE4. Oil prices are going back up.
With the drought and Bernanke QEing causing food prices to skyrocket it should make the masses restless. Food stamps won't buy as much.
Just inform the pissed off people know where Bernanke, Dudley, Yellen and the rest of the Fed governors reside when they can't afford to eat anymore.
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’.
Duh - NO. This was the beginning of voodoo economics (cut taxes, spend, borrow) which is NOT prosperity. Is was the beginnning of the end of the world.
And now that countries can no longer play this phony game because they can no longer borrow, they are printing.
It's time to recognize the Reagan junta as what it truly was - a complete and utter dangerous joke. If any one person is responsible for the situation we are in now - it is Ronald Reagan.
I shit and piss on that fuckers grave.
Ronny had the IQ of a peanut, he was an actor, that took directions. Wake-up, Potus is just the entertainment used to keep you laughing/angry distracted, during the penetration!
So tired of waiting for the crash, hurry u already so we can re-set. Everyone apply for welfare and food stamps, een if you are not qualified the overload will drive the office staff nuts and maybe with EVERYONE on the dole, the absurdity of it will be seen and crash the system
Politics, like economics, is about who gets what. Say if oldmanagain was reduced to nothing under Keynes, then perhaps he may harbor some slight suspicion that either the self serving model of Keynes worked right down to the question for who. If he actually bothered to research and understand how this magnificant edifice of social engineering (known as Keynesian economics) was used to reallocate resources from those who saved their money lost half in value in just a few years after decades of work he may suspect the collection of knowing "economists" who get Keyensian models in their 101 or first year courses. If he actually took the whooping few minutes of research to see how real wealth, like ... say real estate was transferred after years of labor to the very pinnacle of the 0.001 percent of the population using an institution, such as the Fed who purchased 100 percent of Fanny and Freddy inventory of foreclosed houses. Well, he may be convinced that this is scientific proof of the brilliant mind of John Maynard Keynes at work and not some distortion or abberation.
If further, he had somehow gotten himself into grad school and studied Finance or Economics, oldmanagain may have bumped into the very people who engineered the acceptance of Greece into the Euro but then he would have had to go the among the very best schools for that to happen, right?
And, of course, the little pesky details of how this self serving Keynesisan economics actually differed from convential physics, say in that Einstein physics really challenges Newtonian mechanics but not that they are all physiscs that explain physical behavior in their respective areas. Damn, that might mean that a ZH'er actually has an education and a lot more than the myopic ad homenium attack on this whole class of a ZH group.
Humm, and the part about circular flow of spending so essential to the Keynesian model was somehow missed when so much money transfers out, in fact, to this global supply chain. He may just go read something like :: <a href="http://feasta.org/wp-content/uploads/2012/06/Trade-Off1.pdf">Global Supply Chain</a>
Hey, after reading some few facts, one comes to the conclusion that oldmanagain either isn't really clear on Keynesian economics or oldmanagain may just be a shill.
Then again, one may just want to pay attention to Bernake when the limits of this "model" are reflected in the tradeoff in the employment numbers of 94,000,000 people out of work and a whopping 80,000 jobs - low paying - added to the economy as the population in the US grew.
The Club Rome predictions on the Limit of Growth are still valid. Question is, was this a prophecy or a directed selffulfilling prophecy?
The contention that this applies only to the "developed" world is poppycock. China is in the same boat, as are India and Brazil.
Since almost all of the additional debt is thanks to bailing out the finance industry, not deficit spending for infrastructure et al, the text is completely wrong.
The correct question would be: is bailing out of banks the most sensible way to spend taxpayer's money, or shouldn't zombie banks be dismantled instead?
My 3 year old nephew can explain it to anyone that no amount of interest can ever be paid, mathematically speaking of course.
If you ask him, this is what he will say: "Usury is unpayable", he will tell you.
Animal, Vegetable, Mineral. The first 2 are organic he will continue. An animal can pay you interest by bearing offspring. A tree can pay you interest by bearing fruit. But if you loan me a coin, I can not return that coin to you 10% bigger than it was at the time you loaned it to me. Same with paper, he will explain to you. If you loan me a piece of paper, I can not return that piece of paper to you 10% bigger than it was when you loaned it to me. However, he will admit with a twinkle in his eye, if you loan me a coin or a piece of paper, I can pay you interest in the form of fruit from my tree or eggs from my chickens.
Understand, he will ask you?
"The entire government is a scam", he will tell you, "they're all Bankers!"
If you ask him why people let the private Bankers print themselves free money and steal everything from us with it, he will laugh at you and explain that they have guns, and if you don't let them steal they will shoot the president like they did to Kennedy.
Kid makes me proud.