There are those, increasingly more of them, including such shocking statist luminaries as Alan Greenspan (the person more responsible for today's global depression than anyone else) and the Treasury Borrowing Advisory Committee, who are realizing that the old debt=growth, saving=bad, spending=prosperity and inflation=utopia economic paradigm, the one unleashed by John Maynard Keynes, is the primary reason for today's worldwide economic devastation, a condition where $100 trillion in global debt has brought global growth to a crawl, and which coupled with endless "wealth effect" printing by central banks who have deposited $10 trillion in electronic money at their favorite commercial banks with the explicit instruction to buy spoos, have bet everything on reflating the world out of its debt quagmire, instead having achieved a world that has never been more split between the haves and have nots.
And then there is BusinessWeek, which quite to the contrary, is urging its readers in its cover story, ignore common sense, and do more of the same that has led the world to dead economic end it finds itself in currently. In fact, as NYT's Binyamin Appelbaum summarizes it best, it calls "the world governments to become the slaves of a defunct economist. "
And spend, spend, spend, preferably on credit.
Because, supposedly, this time the resulting crash from yet another debt-funded binge will be... different?
Then again, an article that has this line...
With fiscal policy missing in action, the world’s biggest central banks tried heroically to plug the gap.
... surely has to be premised on sarcasm: hardly anyone can be so clueless not to realize that it is the "heroic" central banks "getting to work" for the past 6 years that has enabled fiscal policy to stay on the sidelines as politicians become nothing but Wall Street marionettes, that has led to the most dysfunctional Congress in history, to a Europe that in the past 5 years has implemented precisely zero reforms, and where nothing at all has changed... except debt has hit new record highs, the amount of reserves in circulation is unchartable, the number of billionaires is hitting new records every week even as the people living on foodstamps and out of the labor force is unprecedented, and, of course, the S&P 500 is at an all time high.
So we will operate on the assumption that indeed BusinessWeek's Peter Coy, in his cover story, is merely pulling a prank. Because the alternative is far scarier, if funnier to contemplate.
There is a doctor in the house, and his prescriptions are more relevant than ever. True, he’s been dead since 1946. But even in the past tense, the British economist, investor, and civil servant John Maynard Keynes has more to teach us about how to save the global economy than an army of modern Ph.D.s equipped with models of dynamic stochastic general equilibrium. The symptoms of the Great Depression that he correctly diagnosed are back, though fortunately on a smaller scale: chronic unemployment, deflation, currency wars, and beggar-thy-neighbor economic policies.
Some of the other pearls.
This isn’t a stable status quo. The mid-October shock in global stock markets betrayed grave concerns about a relapse. While the U.S. economy is growing adequately for now despite the drag from fiscal policy, China’s pace is slowing, Japan is suffering from the self-inflicted wound of its consumption tax hike, and the 18-nation euro zone had zero growth in the second quarter. That simply isn’t good enough, Treasury Secretary Jacob Lew said in an October visit to Bloomberg. “You need all four wheels to be moving,” he said, “or it isn’t going to be a good ride.”
Enter Lord Keynes. Cutting interest rates is fine for raising growth in ordinary times, he said, because lower rates induce consumers to spend rather than save while stimulating businesses to invest. But where rates sink to the “lower bound” of zero, he showed, central banks become nearly powerless, while fiscal policy (taxes and spending) becomes highly effective as a fix for inadequate demand. Governments can raise spending to stimulate demand without having to worry about crowding out private investment—because there’s plenty of unused capacity, and their spending won’t lift interest rates.
It’s the closest thing economists have found to a free lunch. Keynes, ever the provocateur, argued that in a deep recession anything the government did to induce economic activity was better than nothing—even burying bottles stuffed with bank notes in coal mines for people to dig up.
Of course, it’s far better if the money is spent well. Considering the crying need for better roads, bridges, tunnels, schools, and the like, it’s a no-brainer for governments to build them now, when there are willing hands and cheap loans. Harvard economist Lawrence Summers, a former Treasury secretary, and Brad DeLong of the University of California at Berkeley argued in 2012 that infrastructure investment might even pay for itself, in part by keeping people employed so their skills don’t atrophy.
Love him or hate him, there’s no one like Keynes on the world stage today. He was a statesman, a philosopher, a bohemian lover of ballet, and a member along with Virginia Woolf in the artsy, intellectual Bloomsbury Group. He made and lost fortunes as an investor and died rich. In 1919, in a prescient book called The Economic Consequences of the Peace, he condemned harsh reparations imposed on Germany after World War I, which were so punitive that they helped create the conditions for Adolf Hitler’s Third Reich. In 1936 he essentially invented the field of macroeconomics in his masterwork, The General Theory. From 1944 until close to his death at age 62 two years later, he led Britain’s delegation in negotiations that resulted in the founding of the International Monetary Fund and the World Bank.
The world was lucky in the 1970s and early 1980s, when finally Keynes lunacy quickly unravelled, when as even Coy admits, "his theories couldn’t readily account for stagflation—the coexistence of high unemployment and high inflation."
Academic economists were drawn to the new theory of “rational expectations,” which said that government couldn’t possibly stimulate the economy through deficit spending because foresighted consumers would rationally expect that the stimulus would have to be paid for eventually and so would save for future tax hikes, offsetting the initiative. Supply-side economists said Keynes missed how low taxes could stimulate long-term growth by inducing work and investment. “Unsuccessful policies and confused debates have left Keynesian economics in disarray,” the Swedish economist Axel Leijonhufvud wrote in 1983 for a conference celebrating Keynes’s centennial. A successor theory that evolved in the 1980s and 1990s, New Keynesianism, attempted to inject rational expectations theory into Keynes’s worldview while preserving his observation that prices and wages are “sticky”—i.e., they don’t fall enough in a slump to equalize supply and demand. New Keynesians range from conservatives such as John Taylor of the Hoover Institution to liberals like Berkeley’s DeLong.
Of course, what ended up happening is that one bad theory was replaced by an even worse one, when in 1980s Alan Greenspan unleashed the "Great Moderation" genie and the Fed's bubble factory was put on Max. But that is a topic too complex for the BW author. Instead, he quotes Joe Lavorgna:
On Wall Street, Keynesianism never really died, because its theories did a good job of explaining the short-term fluctuations bank economists are paid to predict. “We approach forecasting more from a Keynesian perspective whether we like him or not,” says Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities
Actually, Joe, speak for yourself. And then there is the inevitable outcome of the entire world following Keynesian policies. War.
If Keynes were alive today, he might be warning of a repeat of 1937, when policy mistakes turned a promising recovery into history’s worst double dip. This time, Europe is the danger zone; then it was the U.S. What’s called the Great Depression was really two steep downturns in the U.S. The first ended in 1933. It was followed by four years of output growth averaging more than 9 percent a year, one of the strongest recoveries ever. What aborted the comeback is still debated. Some economists blame President Franklin Roosevelt for signing tax hikes and cuts in New Deal jobs programs. Others blame the Federal Reserve. Dartmouth College economist Douglas Irwin argues that the Roosevelt administration triggered the relapse by buying up gold, removing it from the U.S. monetary base. The move to prevent inflation succeeded all too well, causing deflation. Whatever the cause, Britain and other trading partners were dragged down, and U.S. output plunged and didn’t fully recover until America’s entry into World War II. “We are really at a kind of 1937 moment now,” says MIT’s Temin. “It’s a cautionary history for us."
In short, let's accelerate the world's collapse into yet another global war and listen to Keynes once again. Judging by the number of all out conflicts around the globe, and how much the latest "war on terror" boosted US Q3 GDP we are already half way there.
Not enough humor? The rest can be found here.
Then again, maybe the joke's on us, and the only thing that one can hope is "stimulated" are magazine sales.