Keynesianism Could Help Fight Looming Economic Crisis – OpEd – Eurasia Review

By Jonathan Power*

The most peculiar aspect of the economic crisis that is looming so far is that no one has mentioned the three words, John Maynard Keynes.

Keynesian economics, intellectually derided by the Chicago school, particularly by Milton Friedman, and politically decried by Margaret Thatcher and Ronald Reagan, experienced one of its periodic comebacks after the crash of 2008. solutions are finally starting to emerge where it counts. the most,” editorialized the FinancialTimes, “the use of public funds to support the banking system and the desire to put fiscal policy on an expansionary path”. It was very Keynesian.

Yet even now significant elements of anti-Keynesianism persist despite the current severe economic malaise. We are talking about a global recession. The US Federal Reserve is likely to raise interest rates by 1 point. The British Conservative government has long cut social spending in order to generate a surplus, which the Conservatives continue to advocate. Yet many top academics have proven that raising interest rates and cutting costs on spending of any kind, social or otherwise, will hit the less fortunate the most.

These errors, important as they are, are minor flaws compared to the refusal to open the door to a broader intellectual appreciation of the Keynesian teaching on the need for greater liquidity by governments or the International Monetary Fund ( IMF).

Keynes believed that if the IMF or high-income countries such as the United States and the United Kingdom used the resources at their disposal, growth should not be hindered, despite an apparent crisis. What the United States and the United Kingdom are currently experiencing is not so much an impending economic crisis as a liquidity crisis.

Just before the end of World War II, Western powers decided to rethink the international financial system. Meeting in July 1944 in Bretton Woods, their best experts, including Keynes, discussed a new world order, convinced that the world system could not be left at the mercy of the unilateral action of governments or the anarchic functioning of international markets. Thus were born the IMF and the World Bank. It was both a great success and a great disappointment. Over the past eight decades, both institutions have been invaluable, but this success only begs the question of what they could have done if Keynes’ original vision had not been scaled down.

Keynes proposed an IMF whose resources would be equal to half of world imports. Keynes saw the IMF evolve into a global central bank capable of issuing its own reserve currency in sufficient quantity to meet expansion needs when and where needed. Today the IMF has so-called special drawing rights, but they represent only a small fraction of global liquidity.

Keynes viewed balance of payments surpluses as a vice and deficits as a virtue. It is the deficits that support demand and generate an increase in employment. He went so far as to say that exceptional trade surpluses should be penalized by an interest rate of 1% per month. Thus, in Keynes’ vision, there would be no persistent debt problems because the surpluses would be used by the IMF to finance the deficits. Keynes’ vision never materialized.

“So what happens now if interest rates go up?” Nobel laureate economist Paul Krugman recently asked, “No one knows. If you want to be optimistic, you could say that there is no need to panic since spiraling debt is a feature of an increasingly globally integrated world, not a bug.

Consider this optimistic scenario:

At present, the European Union is implementing a policy which should help bring down interest rates, granting free 390 billion euros and an additional 360 billion euros in low-cost loans interest rates (about the same in US dollars) to southern European countries as they grapple with the economic and financial fallout from the coronavirus, just as they were recovering – some very slowly – from the economic catastrophe caused by the American crash of 2008.

At first, EU heavy hitters Germany and France said the money wasn’t there (in part because they thought it would be inflationary). But pretty soon they changed their minds and said it was, and it could be given away, not even lent.

Where did the northerners get such large sums of money? Of their own discovery. They used their hefty savings as collateral, allowing them to borrow at very low interest rates.

Could they do the same today as interest rates rise? They could because, by historical standards, interest rates and inflation are expected to fall next year as the supply-side slowdown in the global economy eases as the impact of the setback Corona-induced continues to subside. Moreover, it looks like Russia is going to loosen its grip on Ukrainian grain exports. Thus, inflation and therefore interest rates should fall, if not almost to zero as they have been with the American Federal Reserve and the European Central Bank, at least to 2 or 3%, which is very low by compared to the period before 2008. decade. According to last week’s Economist, the UK Treasury can now borrow for another 10 years at an annual interest rate of just 2.1%.

In Britain’s contest for a new Prime Minister, former Chancellor of the Exchequer (Finance Minister) Rishi Sunak, argues that he would implement a tax hike if he became the country’s boss.

It is both anti-Keynesian and myopic. The poorest sections of British society have already been hit hard by 12 years of Tory rule. Child poverty increased dramatically, libraries were closed and the free health service was harmed. It is highly likely that more tax increases will be imposed on the poor, while imposing a relatively lesser burden on the wealthy. This is the reverse of what should happen.

Keynes is widely regarded in the economics profession as the wisest economist who ever lived, with the exception of Adam Smith, the originator of science in the 18th century. To sum up, Keynes actually said, “Let’s look at the problem this way. In times of recession, a family must reduce its budget to survive. But, paradoxically, if a nation is in recession, the government must spend if it wants to boost the economy and therefore the national income per capita. Even though it will run a deficit and increase its debt if it increases, it will exceed the new debt. As long as its economy is strong and well managed, it is more than solvent and can sustain the debt.”

To deal with the crisis of 2008, American policy under the administration of President Barack Obama became almost 100% Keynesian. The Federal Reserve, immediately after its election, injected $85 billion into the economy. When asked if the Fed had this amount of money on hand, its chairman Bernard Bernanke replied: “we have 800 billion”. In fact, there was more: an unlimited credit card. The Fed can just print money, as many dollars as it wants. The same goes for the ECB and Japan. By the end of 2008, the Fed had pumped $1.3 trillion into the economy. Later, even conservative Germany followed this policy.

The coronavirus has also made politics relevant in the United States, even more so than in 2008. Fed Chairman Jerome Powell said, “When it comes to lending, we’re not going to run out of ammunition.”

Today’s policy makers should be as wise as Keynes. Now is the time for governments to increase their spending, especially social and climate spending. They can afford it because it will speed up growth. Growth will allow interest rates to fall. In this case, lower interest rates and growth will help lower the inflation rate. We should keep our eyes focused on the Keynesian mantra.

The author is the author of “Development Economics” (Pearson Longmans). For 17 years he was a foreign affairs columnist for the International Herald Tribune. See his website for more information:

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