The belief that more government borrowing lessens recession severity has a long but professionally embarrassing history.
The theory that recessions can be due to insufficient (government) spending is widely attributed to English super-star economist John Maynard Keynes (1883-1946).
Much more problematic is the unqualified proposition that yet more government deficit-spending will alleviate recession.
Economists who espouse this view are commonly called naïve Keynesians.
The naïve proposition has repeatedly failed. A significant setback occurred in the late 1970s, when deficit spending, high unemployment and high inflation all persisted in the prosperous oil-importing countries.
A more embarrassing setback came in 1981 when 364 UK economists wrote to the Times asserting that the Thatcher government’s monetarist policies would fail. In the event, economic recovery started about the same time as the letter appeared Thatcher’s policies brought inflation down and ended the recession.
In New Zealand in 1982, a deficit-spending government cut taxes to buy trade union support for a wage and price freeze.
The day the news broke, I encountered a well-known Keynesian economist in the street. Contrary to my expectation, he was pleased and believed the policy would support the slowing economy despite the growing public debt.
The result was a public debt crisis in mid-1984, followed by a decade-long struggle to balance government spending and revenue. Three prime ministers and three ministers of finance were ousted along the way.
Amidst that struggle, a new government cut spending in 1991. Most of Auckland University’s academic economists signed a public letter proclaiming that this would be self-defeating; it could only ‘worsen the recession’.
Embarrassingly for them, June 1991 was the bottom of the recession. The strong economic and employment growth that followed turned fiscal deficits into surpluses.
Globally, there are more examples of the failures of such superficial predictions.
Context is one of the important missing ingredients. If spiralling debt is seen as a growing threat to stability, interest rates will rise and private spending falter.
By credibly committing to decisive corrective action, a government can hope to lift private spending and lending confidence.
Government U-turns can wreck credibility. Margaret Thatcher famously retorted: “this lady is not for turning”. The Keynesian economists lost that policy debate.
Dr Bryce Wilkinson is a Senior Fellow at The New Zealand Initiative, Director of Capital Economics, and former Director of the New Zealand Treasury. His articles can be seen HERE. - where this article was sourced.
Economists who espouse this view are commonly called naïve Keynesians.
The naïve proposition has repeatedly failed. A significant setback occurred in the late 1970s, when deficit spending, high unemployment and high inflation all persisted in the prosperous oil-importing countries.
A more embarrassing setback came in 1981 when 364 UK economists wrote to the Times asserting that the Thatcher government’s monetarist policies would fail. In the event, economic recovery started about the same time as the letter appeared Thatcher’s policies brought inflation down and ended the recession.
In New Zealand in 1982, a deficit-spending government cut taxes to buy trade union support for a wage and price freeze.
The day the news broke, I encountered a well-known Keynesian economist in the street. Contrary to my expectation, he was pleased and believed the policy would support the slowing economy despite the growing public debt.
The result was a public debt crisis in mid-1984, followed by a decade-long struggle to balance government spending and revenue. Three prime ministers and three ministers of finance were ousted along the way.
Amidst that struggle, a new government cut spending in 1991. Most of Auckland University’s academic economists signed a public letter proclaiming that this would be self-defeating; it could only ‘worsen the recession’.
Embarrassingly for them, June 1991 was the bottom of the recession. The strong economic and employment growth that followed turned fiscal deficits into surpluses.
Globally, there are more examples of the failures of such superficial predictions.
Context is one of the important missing ingredients. If spiralling debt is seen as a growing threat to stability, interest rates will rise and private spending falter.
By credibly committing to decisive corrective action, a government can hope to lift private spending and lending confidence.
Government U-turns can wreck credibility. Margaret Thatcher famously retorted: “this lady is not for turning”. The Keynesian economists lost that policy debate.
Dr Bryce Wilkinson is a Senior Fellow at The New Zealand Initiative, Director of Capital Economics, and former Director of the New Zealand Treasury. His articles can be seen HERE. - where this article was sourced.
1 comment:
It is interesting that academics, who are clever individuals, can collectively be so foolishly wrong. It seems they can know anything but themselves.
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